India's Modi seen appeasing voters, putting reforms aside in pre-election budget

Desperate for five more years in power, India’s Hindu nationalist government will woo rural and urban middle-class voters with farm relief measures and tax cuts, said officials privy to plans for the final budget before a general election.

Stung by opposition victories in three state polls last month, and needing to call a national election by May, Prime Minister Narendra Modi is facing growing discontent over depressed farm incomes and doubts over whether his policies are creating enough jobs.

The electoral compulsions mean that major economic reforms, such as tax cuts for bigger companies and plans to bring down the budget deficit, could be put on hold at least until after the election, the sources said.

Piyush Goyal, India’s interim finance minister, will present the budget on Feb. 1, in the absence of Finance Minister Arun Jaitley, who is currently in the United States for medical treatment.

The higher spending, along with a shortfall in tax collections, will push the fiscal deficit up to the equivalent of 3.5 percent of gross domestic product for the year ending in March, overshooting a previous 3.3 percent target, according to one of the sources with direct knowledge of budget discussions.

The finance ministry had cut capital and other spending amounting to 750.8 billion rupees ($10.55 billion) in the last financial year ending in March 2018. But Modi’s government has been stepping back from such fiscal rectitude in recent months.

In its desperation to find ways to pay for pre-election spending, the government has also pressed the central bank to part with more of its reserves, causing a rift that culminated in the resignation of the bank’s governor last month.

Business leaders said the government still has to meet its three-year old promise of cutting the corporate tax rate for larger companies to 25 percent from 30 percent.

The budget, which is interim and is likely to be followed by a full one in July, is expected to project economic growth of around 7.5 percent for the next financial year, while expanding capital spending on railways, roads, ports by 7-8 percent, and estimating an increase in revenue of about 15 percent, officials said.

But the main focus will be on the rural sector and the urban middle-class.

The government is ready with relief measures for farmers, benefits for unemployed youth, higher tax exemptions for the middle class and small businesses, the officials said.

According to two government sources, the farm relief package itself could run to at least one trillion rupees ($14 billion) if the government is to have a meaningful impact on which way voters lean in rural areas, where two-thirds of Indians live.

The pre-election giveaways could give the economy short term momentum, but result in a hangover after the election.

Credit rating agencies have warned that without bringing down other spending, a higher farm subsidy bill will increase future fiscal deficits.

(REUTERS)