India picks fiscal conservatism over growth boost in budget

Bloomberg

India’s new finance minister resisted calls for a fiscal boost to spur a weakening economy, sticking instead to a plan to narrow the budget deficit over time by keeping spending in check.
The fiscal gap target for the year that began on April 1 was lowered to 3.3 percent of gross domestic product (GDp) from 3.4 percent set in February’s interim plan, Nirmala Sitharaman said in her maiden budget in parliament in New Delhi. The deficit is forecast to come down even further to 3 percent of GDP by March 2021, according to the Finance Ministry.
Sitharaman, 59, will be relying on an ambitious revenue target to narrow the deficit as the government reins in spending: she plans to increase taxes on the wealthy, raise duties on gold and gasoline, extract higher dividends from the central bank and boost income from asset sales. On the expenditure side, $11 billion was set aside for farmer support and nearly as much for a capital boost to banks.
Her budget drew applause from bond and currency investors, but left credit rating companies with mixed feelings and stock traders with losses.
The absence of any substantial fiscal stimulus puts the ball back in the central bank’s court to spur growth. The Reserve Bank of India has already cut interest rates three times this year and signalled more easing to come as the global economy continues to weaken. Achieving the competing goals of a lower fiscal deficit and faster growth will be “very challenging,” said Gene Fang, associate managing director at Moody’s Investor Services in Singapore.
That won’t be good news for PM Narendra Modi, who returned to office in May following a landslide election victory. He’s under pressure to revive growth after it slipped to a five-year low of 5.8 percent in the three months to March.
Sitharaman, who is known to be fiscally conservative, focussed her budget on plans to unclog infrastructure bottlenecks and revive investments.
She promised to recapitalise weak state-run banks by 700 billion rupees and announced a package for the stricken shadow-banking sector.
Sitharaman proposed steps to deepen infrastructure financing in the country and measures to boost foreign participation in the corporate debt market. She said the nation needs 20 trillion rupees annual investment on infrastructure, and the government will be tapping the overseas bond market for funds for the first time ever.
The Finance Ministry said growth will probably reach 7% in the current fiscal year, pinning its hopes on greater political stability to spur investments.