India cuts taxes, aims to boost rural economy

Bloomberg

Prime Minister Narendra Modi offered tax cuts and boosted spending on some of India’s poorest citizens hurt by his cash ban as he seeks to shore up support before pivotal state elections.
The budget shortfall is forecast to be 3.2 percent of gross domestic product in the year starting April 1, Finance Minister Arun Jaitley told lawmakers in New Delhi on Wednesday. While that would be unchanged from the current year and wider than the previous target of 3 percent, it’s smaller than economists’ predictions of 3.3 percent. The government will seek to provide a record 10 trillion rupees ($148 billion) in loans to farmers, boost funds for a rural jobs program, and lower taxes for relatively low earners and small companies. The measures cover the bulk of the population including in Uttar Pradesh, a crucial electoral state that votes this month, where results can embellish or scuttle Modi’s 2019 reelection prospects. Better-than-expected public finances may open room for the central bank to lower interest rates.
“The Reserve Bank of India has mentioned the path of fiscal correction as a pre-requisite for a rate cut,” said Priyanka Kishore, Singapore-based Asia economist at Oxford Economics. “So at the margin, it strengthens the case for a 25-basis point cut next week.”
Most economists in a Bloomberg survey published last month predict Governor Urjit Patel will reduce the repurchase rate to 6 percent from 6.25 percent on Feb. 8, the final of seven cuts since January 2015. Lower borrowing costs can help support growth, which Jaitley’s advisers said may dip to a four-year-low of 6.5 percent in the year through March.
Indian shares extended gains, with the benchmark gauge rising 1.8 percent in Mumbai. The rupee strengthened 0.4 percent to 67.5775 per dollar as of 3:35 p.m. and the yield on sovereign bonds due September 2026 rose 1 basis point to 6.42 percent.
The income tax cuts can boost consumption while corporate tax reductions can increase tax compliance, said Ranen Banerjee, leader, public finance and economics, at PwC. Moody’s Investors Service said revenue collections will be an indication of the effectiveness of demonetization and a national sales tax due to be implemented by September.
“We expect the deficit targets to be achieved, although there will be limited room for slippage” in case of an economic downturn, said William Foster, vice president in Moody’s sovereign risk group. “Measures that effectively foster higher foreign direct investment would be credit positive.”

HEALTH SPENDING
India’s central government will boost its health spending 23 percent as Prime Minister Narendra Modi’s government looks to improve one of the most underfunded public health-care systems among the world’s major economies. The Department of Health and Family Welfare’s budget will increase to 489 billion rupees ($7.2 billion) from 397 billion rupees the previous fiscal year, the government said.
Though it presides over the world’s seventh largest economy the Indian government’s health-care spending as a percentage of gross domestic product is only about 1.4 percent, less than both war-torn Iraq and Afghanistan, and the second lowest among the world’s largest economies.
Arun Jaitley, Modi’s Finance Minister, also said he planned to amend the Drugs and Cosmetics Rules to ensure availability of affordable drugs and use of generic medicines, without specifying what that entailed. The government would also formulate new guidelines for medical devices to attract foreign investment to the sector and reduce prices, he said. “We shall continue to undertake many more measures to ensure that the fruits of growth reach the farmers, the workers, the poor, the scheduled castes and scheduled tribes, women and other vulnerable sections of our society,” Jaitley said as he delivered the budget speech before India’s parliament. India is expected to enjoy the fastest growth among its Group of 20 peers this year and Modi’s government is attempting to ensure the world’s largest concentration of people living on less than $1.25 a day share in that prosperity. That kind of extreme poverty means India’s health system must contend with problems like a high rate of infant mortality and communicable diseases almost eradicated in other parts of the world, like tuberculosis. At the same time, India’s growing middle class means diseases like diabetes and heart disease are also on the rise. “It is good that funding is increased but the need is much more,” said Dileep Mavalankar, director of the Indian Institute of Public Health, Gandhinagar. Healthcare inflation is as much as 15 percent in India’s retail health sector, he said.
Jaitley also said Indian medical schools would increase post-graduate acceptance by 5,000 spaces per year to increase access to specialist doctors and will create two new state-run medical research universities.

INFRASTRUCTURE
India announced record spending of 3.96 trillion rupees ($59 billion) to build and modernize its railways, airports and roads as Prime Minister Narendra Modi aims to upgrade the strained infrastructure in Asia’s third-largest economy.
The government will build airports — now a near monopoly of the state — in smaller cities in partnership with private companies, Finance Minister Arun Jaitley said. More suburban railways will come up across the country and Indian Railways, a state monopoly, will form ventures with logistics companies to provide greater connectivity to ports, he said.
Rail equipment manufacturers such as Bombardier Inc. and General Electric Co. are among companies already investing in setting up factories in India as the world’s second-most populous nation seeks to accelerate economic growth by improving infrastructure. Transport Minister Nitin Gadkari has said that the government has a target of building 42 kilometers of roads a day in a nation that stands below Namibia and Azerbaijan in the World Economic Forum’s infrastructure ranking.
Wednesday’s proposals “shall increase the demand for procurement of rolling stock, rail equipment and signaling systems,” Harsh Dhingra, chief country representative for Bombardier Transportation, said in an e-mailed statement after Jaitley announcements. Bombardier opened its first rail-coach plant in India in 2008.
India will announce a metro rail policy, which will ensure implementation and funding, and open up job opportunities, Jaitley said. A new Metro Rail Act will facilitate greater private participation and investment in construction and operation, he said.
Indian Railways, the world’s fourth-largest, carries 23 million people daily on congested and aging tracks with roots dating back to British colonial rule. Sometimes, trains slow to a walking pace. The railways employ 1.3 million people directly.
In 2015, GE and Alstom SA won contracts worth $5.6 billion to build locomotives for the railways. GE won a $2.6 billion deal for diesel engines and will invest $200 million to build a factory under a joint venture with Indian Railways, the company said then. Alstom will make electric engines in a contract worth about $3 billion.

BANKS
The nation will inject at least 100 billion rupees ($1.48 billion) of capital into state-controlled lenders in the coming fiscal year, an amount that’s in line with a previous government pledge, though it raised questions about the ability of local banks to sustain loan growth. The capital target was revealed Wednesday in Finance Minister Arun Jaitley’s federal budget for the year starting April 1, who also told lawmakers in New Delhi that more funds will be allocated “if required.”
The amount — lower than the 250 billion rupees set aside in the previous budget — will be insufficient to help state banks raise the about 800 billion rupees of equity capital that the lenders need over the next two years to comply with Basel III norms and support credit growth, said Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd., the local unit of Moody’s Investors Service. “The government may step in with additional funds,” Srinivasan said by phone after Jaitley’s presentation. “The finance minister has kept the fund infusion target open ended.”