Budget 2017: Modi looks to spend more on India’s poorest with eye on elections

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Mumbai: Prime Minister Narendra Modi offered tax cuts and boosted spending on some of India’s poorest citizens hurt by demonetisation as he seeks to shore up support before pivotal assembly elections.

The budget shortfall is forecast to be 3.2% of gross domestic product (GDP) in the year starting 1 April finance minister Arun Jaitley told MPs in New Delhi on Wednesday. While that would be unchanged from the current year and wider than the previous target of 3%, it’s smaller than economists’ predictions of 3.3%. The government will seek to provide a record Rs10 trillion in loans to farmers, boost funds for a rural jobs program, and lower taxes for relatively low earners and small companies.

Also Read: Full text of Arun Jaitley’s Union budget speech

The measures cover the bulk of the population including in Uttar Pradesh, a crucial electoral state that votes this month, where results can embellish or scuttle Modi’s 2019 re-election prospects. Better-than-expected public finances may open room for the Reserve Bank of India (RBI) to lower interest rates.

“The Reserve Bank of India has mentioned the path of fiscal correction as a pre-requisite for a rate cut,” said Priyanka Kishore, Singapore-based Asia economist at Oxford Economics. “So at the margin, it strengthens the case for a 25-basis point cut next week.”

Most economists in a Bloomberg survey published last month predict governor Urjit Patel will reduce the repurchase rate to 6% from 6.25% on 8 February, the final of seven cuts since January 2015. Lower borrowing costs can help support growth, which Jaitley’s advisers said may dip to a four-year-low of 6.5% in the year through March.

Also Read: Budget 2017: A minimalist approach for an evolving India

Indian shares extended gains, with the benchmark gauge rising 1.8% in Mumbai. The rupee strengthened 0.4% to 67.5775 per dollar as of 3.35pm and the yield on sovereign bonds due September 2026 rose 1 basis point to 6.42%.

Key points from the budget:

• For the current year through March, the budget deficit is forecast at 3.2 percent of GDP compared with the previous 3.5% due to a surge in tax collections

• The shortfall is forecast to shrink to 3% of GDP in the year through March 2019 instead of 2018

• In the year starting April 1, total spending is forecast to rise 6.6% to Rs21.5 trillion. Revenue is seen climbing 6.5% on a 13% increase in tax collections though non-tax revenue will dip

• To borrow gross Rs5.8 trillion, largely unchanged from the previous year

• Budgets Rs615 billion from asset sales; this is higher than the Rs455 billion earned in the previous year when the government undershot its target by 20%

• To treat low-cost housing as infrastructure; to build 10 million houses by 2019 for the homeless

• Infrastructure allocations at a record 3.96 trillion rupees; rail capex Rs1.3 trillion, Rs640 billion on highways

• To inject Rs100 billion into state-run banks, compared with the Rs250 billion set aside in the last budget

• To cut tax on LNG imports to 2.5% from 5% to promote gas usage

• Plans tax relief for overseas investors in some bonds

• Plans to scrap the Foreign Investment Promotion Board, which has been criticized as a bureaucratic barrier that slows foreign direct investment

• Tax rates cut for companies with turnover of less than Rs500 million

• Tax rates cut for people earning less than Rs500,000—fiscal losses will be compensated by a proposed levy on those earning more than Rs5 million

The income tax cuts can boost consumption while corporate tax reductions can increase tax compliance, said Ranen Banerjee, leader, public finance and economics, at PwC. Moody’s Investors Service said revenue collections will be an indication of the effectiveness of demonetization and a national sales tax due to be implemented by September.

“We expect the deficit targets to be achieved, although there will be limited room for slippage” in case of an economic downturn, said William Foster, vice president in Moody’s sovereign risk group. “Measures that effectively foster higher foreign direct investment would be credit positive.