India gears up for ‘make or break’ budget

New Delhi / AFP

India’s government is expected to deliver on promises to overhaul the tax regime and ramp up public spending in its budget on Monday, as Prime Minister Narendra Modi bids to shore up his sagging reputation as a reformer.
The business-friendly premier came to power almost two years ago with promises to overhaul Asia’s third-largest economy and jump-start investment.
But with the halfway point of his term approaching, experts say the budget has to tackle the failure to translate those bold pledges into action while stimulating consumption at the same time.
“This is a make-or-break budget in some ways,” Rajrishi Singhal, senior geoeconomics fellow at Gateway House think-tank in Mumbai said.
“People were a little bit disappointed with the last budget. Now is the time for him (Modi) to start impressing people.”
Finance Minister Arun Jaitley’s second budget last year met with a cool response in many quarters for its lack of “big bang” announcements.
And while official forecasts predict the economy will grow an impressive 7.6 percent over the 2015-16 financial year, it still faces heady challenges.
India’s main stocks index has lost nearly a fifth of its value since last year, private investment is weak and the rupee is at its lowest level against the dollar since 2013.
Despite winning a landslide in the lower house in 2014, poisonous relations between his ruling party and the opposition have stalled the passage of Modi’s flagship Goods and Services Tax (GST) in the upper house.
While Jaitley has previously outlined his intention to reduce corporate tax from 30 to 25 percent before the next election, Monday is expected to be the first time he lays out a detailed roadmap to reach that target.
Soumitra Bhattacharya, joint managing director of the technology company Bosch India, said he was expecting an announcement on how to break the impasse over GST — designed to simplify India’s bewildering multi-layered tax regime — and on the promised cut in corporate tax.

‘Huge stress’
“There is an immediate need to bring GST to reality,” he said. “A clear roadmap for a reduction in the corporate tax rate from 30 percent to 25 percent… will help in boosting business.”
The existing complex corporate tax regime is seen as a turn-off to foreign investors, undermining Modi’s efforts to turn the country into a global manufacturing hub under his ‘Make In India’ campaign.
The government has been praised for efforts to slash red tape, but pundits say it needs to do more to make India an easy place to do business.
Still, while Jaitley is expected to burnish Delhi’s pro-business credentials, the weakness of the global economy may force him to relax his target for slashing the fiscal deficit in favour of more spending.
“It is the effort of the government to present a budget which is growth-oriented and which maintains the momentum of growth and tries to develop on it,” said Shaktikanta Das, a budget secretary in the finance ministry.
Spending pledges are likely to focus on infrastructure, recapitalising public sector banks beset by bad loans, and supporting rural areas struggling after two poor monsoons.
Farmers were key to Modi’s 2014 triumph and he needs to retain their support in key state polls in the year ahead.
Generous salary hikes for civil servants are also expected after a pay commission recommended increases of 23 percent, as is a new pension scheme for retired soldiers.
With these set to cost billions of dollars, the government may delay its target of reducing the fiscal deficit to 3.5 percent of GDP in 2017 as it instead looks to boost consumption.
Experts stress the bigger question is whether promises come to fruition.
“There’s always announcements made, the question is: can they carry them out?” Richard Rossow, an India expert at the Washington-based Center for Strategic & International Studies, said.