India announces $40 billion spending on farms, tax cuts to revive faltering growth
NEW DELHI: India's government announced a multi-billion dollar package of farm and infrastructure support in its budget for 2020/21 as it blew past its fiscal deficit target for the year, but the stimulus fell short of market expectations and battered stocks.
India is grappling with its worst economic slowdown in a decade, with falling employment, consumption and investment ratcheting up pressure on Prime Minister Narendra Modi to revive growth.
The government estimates economic growth this year, which ends on March 31, will slip to 5%, the weakest pace since the global financial crisis of 2008-09.
It has also warned that an expected bounce back in growth the following year might entail a blow out in fiscal deficit targets.
Finance Minister Nirmala Sitharaman, presenting the 2020/21 budget for the financial year beginning April 1 to parliament on Saturday, said 2.83 trillion Indian rupees ($39.82 billion) will be allocated for agriculture and allied activities including helping farmers set up solar power generation units as well as establish a national cold storage to transport perishables.
"Farm markets need to be liberalized, farming need to be made more competitive" she said.
She also said the government will spend $50.65 billion on a federal water scheme to address the challenges facing one of the world's most water stressed nations.
Agriculture accounts for 15% of India's gross domestic and a source of livelihood for more than half of the country’s 1.3 billion population.
But higher government spending has put pressure on public finances, prompting caution from rating agencies. Sitharaman said the fiscal deficit for the current year would widen to 3.8% of gross domestic product, up from 3.3% targeted for the current year.
For fiscal 2020/21 Sitharaman set the fiscal deficit at 3.5 percent as it boosts state funding to shore up a sagging economy that has intensified pressure on Modi, who is already facing a public backlash over a new citizenship law seen as socially divisive.`
Gene Fang, Associate Managing Director, Sovereign Risk, Moody’s Investors Service said: "India's 2020/21 budget highlights the challenges to fiscal consolidation from slower real and nominal growth, which may continue for longer than the government forecasts."
India’s government debt is already significantly higher than the average for Baa-rated sovereigns - a product of persistent fiscal deficits, it said.
"While India’s new budget calls for a modest narrowing of the deficit to 3.5% in the fiscal year 2020/21 from 3.8% in the fiscal year 2019/20, sustained weaker growth and tax cuts would make gross revenue targets difficult to achieve."
Indian shares slid to an over three-month low on Saturday, with sentiment dented by the lack of sufficient stimulus in the budget to lift the economy, analysts said.
The NSE Nifty 50 index dropped as much as 2.1% to 11,717.45, while the benchmark S&P BSE Sensex slumped 1.95%
"Markets had very high expectations from the budget, including that long term capital gains would be removed which would have incentivised people to hold on to shares for a longer time," said Deepak Jasani of HDFC Securities. - Reuters