Home Politics Indian Government Announces Populist Interim Budget Ahead of Polls

Indian Government Announces Populist Interim Budget Ahead of Polls

by fffp12

By: Alessandra Yuan – Forex Focus

Key highlights of the budget include higher tax exemptions for the salaried class and bonuses to farmers.

The Indian Government pushed for a populist interim budget by raising the income-tax ceiling for salaried employees and doling out cash to farmers, in addition to providing monthly pensions to workers in the unorganized sector—as the country gets ready for national elections in the second quarter of this year. The budget with sops to the salaried middle class, small businesses and farmers—who together combine to form more than 80 percent of the vote—was on expected lines; this bank of voters will be the key decision-makers when it comes to the formation of the next government in just a few months.

The populist move is also seen as a response to the BJP (Bharatiya Janata Party) – led NDA (National Democratic Alliance) Government’s losses in five key states, after voters went to the polls late last year; voters led by the farming community punished the government for failing to waive farm loans and cut down the GST (Goods and Services Tax) slab on a number of products related to the agro-industry, in spite of the distress of low food prices and failing monsoons, resulting in a large number of farmer suicides.

Coming back to the budget, following are the key highlights and the likely impact on the country’s fiscal deficit:

  • Farmers with less than two hectares (one hectare = 10,000 square meters) of land will be given farm-income support to the tune of $84 each year, which is likely to assist 120 million farmers. However, the spending plan is estimated to cost the government more than $10 billion annually.
  • A massive pension program was launched for the more than 100 million workers employed in the country’s unorganized, or informal, sector, drawing monthly salaries of less than $210.
  • The government raised the personal income-tax slab from $3,600 to $7,200, which will come into effect from the next financial year, beginning in April. The benefits are likely to be felt by the lower income group estimated to be composed of more than 30 million individuals. In addition, rebates have been hiked fivefold for taxpayers whose annual income does not exceed $7,200.
  • The government’s proposed spending on the animal husbandry and fisheries sectors respectively in addition to an interest-provisioning plan for small and mid-sized companies should benefit businesses having exposure to rural India.
  • To boost the ailing residential real-estate sector, the government has allowed households to invest the income generated from the sale of residential property valued at not more than ₹20 million (US$300,000) without having to account for capital-gains tax.
  • Individuals in possession of two residential properties can claim both properties to be self-occupied and avoid paying taxes. Likewise, the standard deduction of ₹200,000 ($2,850) towards interest on property loans can now be extended to two properties from one.
  • The budget also proposed amendments to raise the threshold limit for companies to register under the Goods and Services Tax. Businesses with annual incomes of up to ₹4 million ($57,000) may not be required to register with the Goods and Services Tax Council and will also benefit from selling their goods and services at much lower cost due to tax advantages, a major plus for small businesses.
  • Manufacturers with an annual turnover of less than ₹15 million ($200,000) may be allowed to pay a one-time tax of 1.0 percent, while the tax on service providers with annual incomes of up to ₹5 million ($71,500) could be subject to a 6-percent composite tax on the total turnover without the added benefits of an input tax credit.

According to government data released in February of this year, India’s fiscal deficit from April-December 2018 touched $97.8 billion or 112.4 percent of the full-year budgeted target on the back of lower tax revenues, which was broadly in line with the 113.6-percent increase in the fiscal-deficit numbers at the end of December 2017. India’s financial year runs from April 1 to March 31, and while the fiscal deficit stood at 3.53 percent of gross domestic product (GDP) in fiscal year 2017-18, the government’s projected deficit target of 3.3 percent for the current financial year is already busted. Moreover, the government’s bid to maintain its fiscal-deficit target at 3.4 percent of GDP for the financial year 2019-20, after covering the additional outlay in the interim budget, is being frowned on by analysts, who expect the deficit to rise by at least 20 to 30 points to the highest deficit position since 2015. Add this to the mounting internal and external debt, and the total value jumps to more than 50 percent of India’s nominal GDP.

The interim budget, or the “vote on account” as it is popularly known, will be effective from April 2019, although the new government that takes charge will present a full-fledged budget following the general election in May-June of this year. With the BJP’s most vocal rival, the Congress, gaining ground just before national elections, the budget is seen as a final push by the federal government to garner popularity. While the benefits are appreciated by households and small-to-medium-scale industries, the farming community is definitely not pleased with the meagre monetary assistance offered by the government.

Will the attempt by the government to please the electorate pay dividends, or will it be too little, too late in what promises to be a hotly contested election battle in the world’s largest democracy!


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