Indian Budget: Politics Outweighs Fiscal Discipline

The interim budget seems to be the last attempt by the Modi government to lure voters, pushing long-term sustainability of public finances in the background. It’s good for people but not for markets as derailed fiscal reform will be an ongoing overhang on investor sentiment.

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The knee-jerk reaction to the budget saw local financial assets - equities, bonds, and the rupee – gaining some ground. But the gains were pared as the budget news fully sank in with the 10-year government bond spiking 12 basis points to 7.61% and the rupee losing 0.3% against the USD to 71.3.

We don’t see the pressure on Indian financial assets abating anytime soon and maintain our view of the USD/INR rate rising above 73 in the near-term.

The budget

As expected, the growing discontent among low and middle-income voters and small businesses nudged the government to push for its re-election agenda harder today. 

The budget for the full year (financial year starting 1 April 2019) unveiled by interim finance minister Piyush Goyal was high on social spending and tax cuts but low on revenue-boosting measures, while the long-term goal of cutting down the fiscal deficit to a comfortable 3% level will likely remain on paper.

The budget didn’t fall short of big-bang (vote-seeking) spending measures, especially for farmers and low-income voters

Despite being an interim budget, the vote-on-account, as the convention for a government heading into an election goes, it didn’t fall short of big-bang (vote-seeking) spending measures, especially for farmers and low-income voters. Meanwhile, a surge in government spending in the current financial year caused yet another breach in the fiscal deficit, above the original target set for the year. This is despite the projection of strong revenue growth promised in the original budget. 

Key budget highlights

  • The fiscal deficit was projected to be 3.4% of GDP in FY19, an upward revision from the 3.3% original projection. It is projected to remain at 3.4% in FY2020.
  • INR 750bn ($10.6bn) support package for farmers comprising of assured income of INR 6,000 per year for 120m of farmers with land holding under two hectares. 2% interest subvention to those pursuing animal husbandry and fisheries.
  • INR 190bn for rural roads program in FY2020 - an unchanged amount from the allocation in FY2019. Increase in allocation to Rural Employment Guarantee program by INR 50bn to INR 600bn for FY2020.
  • A pension plan for the organized sector. INR 3trillion for defence spending.
  • Personal income up to INR 500,000 exempt from income tax. Increase in the standard deduction for income tax to INR 50,000 from INR 40,000. Increase in the limit on tax deduction at source (TDS) from INR 10,000 to INR 40,000.
  • Easing of tax rules for property - income tax exemption on a second residential house and considerations for easing of goods and services tax (GST) burden for homebuyers.
  • FY20 net borrowing set at INR 7.04t with a planned reduction in the debt-to-GDP ratio to 40% by FY2025 from estimated 49% for FY19.
  • Strong nominal GDP growth of 12.3% in FY19 and 11.5% in FY20.   
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