Budget sops before Elections

The Narendra Modi-led government unveiled a budget tailored for an election year with tax breaks, relief for small business and unorganised sectors and a promise to build the infrastructure for a $10 trillion economy. 

Background

The Union Budget of India, also referred to as the Annual Financial Statement in the Article 112 of the Constitution of India, is the annual budget of the Republic of India. The Government presents it on the first day of February so that it could be materialized before the commencement of new financial year in April. Till 2016 it was presented on the last working day of February by the Finance Minister of India in Parliament. The budget, which is presented by means of the Finance bill and the Appropriation bill has to be passed by both the Houses before it can come into effect from April 1, the start of India's financial year.

An Interim Budget is not the same as a 'Vote on Account'. While a 'Vote on Account' deals only with the expenditure side of the government's budget, an Interim Budget is a complete set of accounts, including both expenditure and receipts. An Interim Budget gives the complete financial statement, very similar to a full Budget. While the law does not debar the Union government from introducing tax changes, normally during an election year, successive governments have avoided making any major changes in income tax laws during an Interim Budget.

The first Union budget of independent India was presented by R. K. Shanmukham Chetty on November 26, 1947. The interim budget for 2019-2020 was presented by Piyush Goyal, who has the additional charge of the Ministry of Finance until Arun Jaitley recovers from his surgery. 

Analysis 

Prime Minister Narendra Modi’s government has unveiled $2.8bn in direct payments to India’s small farmers over the next two months and $2.6bn in fresh tax breaks for the middle class as it seeks to shore up its sagging popularity ahead of upcoming elections. Piyush Goyal, acting finance minister, said that the Modi government would transfer $2.8bn to the owners of 120m small and medium-sized farms by March 31, as it kicks off a new income-support scheme to help distressed farmers. 

Presenting the interim budget for the final months of the current administration, Mr. Goyal promised that, from next year, farmers with less than 2 hectares of land would receive Rs. 6,000 ($84) a year directly into their bank accounts in three equal instalments. 

The social welfare scheme, which will cost the government $10bn for a full year, is intended to assist small farmers who eke out a living on small parcels of land and have suffered from a sharp fall in crop prices over the past few years. The administration also unveiled generous tax breaks for members of India’s middle class, doubling the threshold for payment of individual income tax from Rs. 250,000 to more than Rs. 500,000. Fresh tax breaks were also unveiled for the real estate sector.

However, Mr. Goyal acknowledged that the government would overshoot its fiscal deficit target of 3.3 per cent of gross domestic product for the current April to March financial year, with the actual deficit likely to come in at 3.4 per cent. He also set a fiscal deficit target of 3.4 per cent of GDP for next year, veering off course from the government’s earlier plan to pare the deficit to 3.1 per cent by the end of last year. 

The government also announced plans for a new pension scheme that would provide 100 million unorganised and informal sector workers with assured monthly pensions of Rs3,000 once they hit the age of 60, though they would have to pay into the plan to benefit.

Counterpoint

Many economists and business people say the premier’s rosy picture appears to be out of sync both with other leading indicators and the public mood. The government has been accused of suppressing a disquieting report that shows unemployment at a 45-year-high, with joblessness particularly rife among younger people. Moody’s, the credit rating agency, warned that the interim budget, and the government’s continuous failure to meet its own fiscal deficit targets, “does not bode well for medium-term fiscal consolidation”.  Ten-year bond yields rose slightly to 7.3 per cent after the budget presentation.

Assessment

Our assessment is that this interim budget is targeted towards winning the 2019 Election for BJP. We believe that the BJP is spending more and putting aside its own 2014 election promise to reduce the Fiscal Deficit in order to gain more popularity in the run up to the election.