Indian Prime Minister Narendra Modi stuck with a plan to narrow the budget deficit in the next fiscal year even while providing relief for farmers, heeding a warning from the nation’s central bank Governor Raghuram Rajan that any deviation risked jeopardizing India’s world-beating economic growth.
The shortfall is to narrow as planned to 3.5 percent of GDP in the year starting April 1, the smallest gap since 2008, Indian Finance Minister Arun Jaitley told lawmakers yesterday.
It is expected to hit a target of 3.9 percent of GDP in the current fiscal year, he said, adding that longer-term goals would be reviewed. He made no immediate mention of a plan to narrow the deficit to 3 percent of GDP by March 2018.
“Different schools of thought have argued either in favor of fiscal consolidation and stability or for less aggressive consolidation and for boosting growth,” Jaitley said. “I have made the policy option and decided that prudence lies in adhering to fiscal targets.”
The move might help Modi win another rate cut as low global oil prices are forecast to keep inflation near next year’s target.
Rajan in January warned of higher bond yields if Modi strayed from the deficit-reduction path, calling macroeconomic stability India’s “single most important strength” in a time of global market turmoil.
The markets were mixed as Jaitley read through the speech. The S&P BSE SENSEX fell 1.1 percent as of 12:20pm in Mumbai, the rupee was little changed, while the yield on the benchmark 10-year sovereign bond fell seven basis points to 7.71 percent after Jaitley stuck to his deficit targets.
“The target of 3.5 percent looks prudent,” Singapore-based economist Rahul Bajoria at Barclays PLC said. “If accompanied by reasonable revenue assumptions, the target will stoke growth in infrastructure sector while crowding in private sector investments.”
With as many as nine state elections coming up in the next fiscal year, Modi faced pressure to provide relief for farmers suffering after India’s first back-to-back droughts in three decades.
About 70 percent of the nation’s 1.3 billion people live in small villages.
“We’re grateful to our farmers for being the backbone of our food security,” Jaitley said. “We need to think beyond food security and give to our farmers a sense of income security.”
Key points in the budget include doubling farmers’ income in five years; expanding irrigation and crop insurance programs; a unified agriculture market; a health insurance scheme to protect a third of the population; ensuring universal coverage of cooking gas; record allocation for rural jobs program; more rural roads and railways; 100 percent electrification of villages by May next year; allowing 100 percent FDI in the food processing sector; and easing FDI rules in exchanges, insurance and asset reconstruction.
“It’s heartening to see that a lot of measures have been taken to improve agricultural infrastructure and productivity, besides providing short-term stabilization support to farm sector reeling under the stresses of back to back drought,” L&T Finance Holdings Ltd chief economist Rupa Rege Nitsure said.
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