India's Hindu nationalist-led government pledged 750 billion rupees ($10.56 billion) to support farm incomes and reduced the tax burden for middle class voters on Friday, hoping to refind favor with its last budget before a general election. Prime Minister Narendra Modi is facing discontent over depressed farm incomes and doubts over whether his policies are creating enough jobs. With opinion polls suggesting that Modi's Bharatiya Janata Party (BJP) could lose its parliamentary majority in an election that must be held by May, the government delivered a budget to shore up support in the countryside, where two-thirds of Indians live, and among the urban, salary-earning middle class. The interim budget for 2019/2020 offered direct cash support to poor farmers and allocated more funds for a rural jobs guarantee scheme and rural development, like building roads and homes. Vying with an opposition that has also trumpeted budget-straining populist plans to win support from poorer voters, the government said it would launch a pension scheme for people working in India's vast unorganized sector. The budget proposals also reduced the burden for the middle class, by raising the income tax threshhold from 250,000 rupees to 500,000. Many of the measures were aimed at putting money into pockets quickly. "This is not just an interim budget, this is a vehicle for the developmental transformation of the nation," Acting Finance Minister Piysh Goyal told the lower house of parliament, as BJP lawmakers thumped their desks and chanted "Modi, Modi". "India is solidly back on track and marching towards growth and prosperity," said Goyal, who delivered the budget instead of Finance Minister Arun Jaitley, who was undergoing medical treatment in the United States. India was expected to expand 7.2 percent this fiscal year, Goyal said, keeping its slot as one of the world's fastest growing major economies. But a report in the Business Standard daily the previous day belied the government bullishness over the economy. It said that the government has been withholding an official survey that showed India's unemployment rate at its highest in decades. Garima Kapoor, an economist at Elara Capital investment bank in Mumbai, said the budget favored farmers, older voters, workers in the unorganized sector, small and medium sized businesses and middle class families. "The budget is clearly farm-focused, with elections on the mind," Kapoor said. The interim budget for 2019/20 allocated 600 billion rupees for a rural jobs program and 190 billion for building of roads in the countryside. The big giveaways resulted in fiscal slippage, for a government that has been seeking to drag down its deficit. The budget would put the fiscal deficit for the year ending on March 31 at 3.4 percent of gross domestic product (GDP), slightly higher than the targeted 3.3 percent. Goyal set a deficit target of 3.4 percent for 2019/20, instead of the earlier target of 3.1 percent, but he went onto project the deficit would come down to 3 percent in both of the following two years. "The fiscal deficit flat at 3.4 percent of GDP, which is a sharp deviation from fiscal consolidation roadmap, is a disappointment. The consequent numbers of both net and gross market borrowings seem higher than the market expectation," said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank in Mumbai. India's fiscal slippage also drew a warning from credit rating agency Moody's Investors Service. "Taken together, it doesn't really bode well for their medium-term fiscal consolidation targets," said Gene Fang, associate managing director at Moody's sovereign risk group. "From that perspective we would say, on balance, it's credit negative." But Fang said the budget announcements did not change the rating agency's stance on India. Moody's rates India at "Baa2" with a "stable" outlook. India's bond and currency markets see-sawed as investors were initially relieved the at fiscal slippage wasn't any worse, but the market became jittery over the budget plan to borrow 7.04 trillion rupees in the coming fiscal year. The benchmark 10-year bond yield was at 7.48 percent, having traded at 7.49 percent prior to the budget announcement, while the rupee firmed very slightly to trade at 71 against the US dollar. Share markets were barely changed. Shashank Mendiratta, Economist, IBM, New Delhi, said: "The fiscal deficit of 3.4 percent still looks optical for FY19, and this year we have seen low GST collections. On the revenue side, GST collections are optimistic." "I think it's (tax cuts) a reasonable multiplier for consumption. Their revenue estimates seem to be optimistic, particularly on the GST front, which the government is budgeting at about 18 percent growth rate." "If you look at April-December, the growth rate in India's tax collections is only about 6 percent, so 18 percent looks very aggressive to me." Aurodeep Nandi, India Economist, Nomura, Mumbai said: "As expected, the budget had a farm charm component — budgeting 0.36 percent of GDP as direct cash transfer for farmers in FY20 and 0.1 percent of GDP in FY19. More expensive options like farm loan waivers have been avoided. The additional bonanza for middle class comes as a surprise. As an expansionary budget, it effectively kicks the fiscal consolidation further down the road." Devendra Kumar Pant, Chief Economist, India Ratings & Research, Mumbai, said: "They are building an 18 percent increase in GST (collection) which is really a big number. Going by the average rate, they have earned around 10 percent (more GST) in April-November ... Going from 10 percent to 18 percent is a tall order because we are not increasing the tax rate, we are talking about an increase in collection. Can this amount of 18 percent growth come from improving efficiency? That appears a bit exaggerated." Tanvee Gupta Jain, Chief India Economist, UBS Securities India, Mumbai, said: "The fiscal deficit target for this year was largely in line with market expectations but the fiscal deficit target at 3.4 percent for full year 2020 was a little disappointing." "Populism remained the focus ahead of elections. The budget provided a consumption boost to farmers and middle-class households. However, it will further delay the much needed investment cycle recovery." Anubhuti Sahay, senior Economist, Standard Chartered Bank, Mumbai, said: "The fiscal deficit targets for FY19 as well as FY20 are far better than market expectations, though there is a slight slippage... It is likely to bring a lot of relief to the market, which was excessively worried about the massive fiscal slippage." "Having said that, what we would like to see are its revenue projections and it is possible that the projections might be ambitious at this particular juncture. Maybe once we get the numbers going forward there can be some worries again around the fiscal deficit, whether it can be adhered to or not." "The budget was focused on farmers and the middle class that should help consumption and probably support the domestic growth." Shilan Shah, Senior India Economist, Capital Economics, Singapore, said: "Pretty much in line with what was expected. The one thing that has surprised is the extent of election-related sweeteners that have been rolled out." "So, we thought there would be less space to announce big giveaways, but the government has actually managed to pull it off, at least on paper." "I think ultimately, their spending plans look very unfeasible to me, so I wouldn't be surprised to see spending get cut later in the year." "It looks pretty difficult to achieve but it seems to be based on quite ambitious revenue projections." "The biggest stops that we have seen are the giveaways for farmers especially." — Reuters
