NEW DELHI: Indian Prime Minister Narendra Modi's first post-election budget on Tuesday will seek to lay out an economic vision that balances fiscal prudence with the expectations of disaffected voters and the demands of his coalition partners.
“This budget will determine the direction of our work for the next five years and this will lay the foundation for fulfilling our goal of making India a developed country by 2047,” Modi said on Monday ahead of the budget, to be presented by Finance. Minister Nirmala Sitharaman.
Modi's Hindu nationalist Bharatiya Janata Party (BJP) failed to secure a majority in elections last month, leaving it dependent on allies to form a government for the first time since he came to power more than a decade ago.
The budget is expected to cut taxes for the middle class, provide relief to distressed rural areas and comply with demands from two key coalition partners – Andhra Pradesh's Telugu Desam Party and Bihar's Janata Dal (United) – for billions of dollars in additional funding for their regions.
“Weaker political capital, uneven growth story with tepid consumption and lack of vigor in private investment and the rural sector form the backdrop of the upcoming budget,” said Madhavi Arora, economist at Emkay.
The government will also try to contain a resurgent opposition that has criticized Modi's government for a lack of jobs, high living costs and widening income inequality.
According to a report by the World Inequality Lab, the concentration of wealth in the richest percent of India's population is the highest in six decades, while youth unemployment is over 17 percent according to government estimates.
INFRASTRUCTURE SPENDING
A government report published on Monday forecast economic growth of between 6.5 percent and 7 percent for the current fiscal year, slightly below consensus analysts' estimates.
However, the government has enough coverage from the central bank to ensure it stays on course to close the budget gap and finance its infrastructure projects.
In May, India's central bank transferred a $25 billion surplus transfer to the government that will help it cover tax cuts, aid for rural areas and coalition partners' demands for regional funding.
Over the past three years, the government has nearly doubled spending on long-term infrastructure projects as a way to drive growth and create jobs, and plans to spend 11 trillion rupees ($131.51 billion) on such projects this year.
Some economists expect the budget could include improvements to an incentive program for domestic and foreign companies to boost manufacturing in India in 14 sectors including electronics, semiconductors and pharmaceuticals.
On Monday, the government's economic survey warned of rising risks from a rising stock market, which is also drawing private investors into risky derivatives trading.
To discourage such risky investments, economists say the budget could include measures such as an increase in capital gains tax on equity investments held for the long term. However, such a move could be a big dampener for Indian stocks and hit the stock market, according to Morgan Stanley.
Any increase in the transaction tax on derivatives would also be a negative surprise, Jefferies said.
Finance Minister Sitharaman is due to present the budget from 0530 GMT.
