India’s fiscal budget disappoints
ON February 1, a Saturday, the Mumbai stock exchange extraordinarily had to open for trading as the Indian parliament approved the fiscal budget for the coming fiscal year, which starts on April 1. From an investor’s perspective, it would have been cheaper if the staff at the exchange just kept the trading floor closed, as the day ended with a -2.4 percent due to disappointed investors.
The Indian government followed track with other governments, like those in the United States, China and the Philippines, by lowering the income tax of middle-class households. In the three aforementioned countries, this step generated more optimism and increased spending among middle- class consumers. In India, however, the investors didn’t cheer for it.
When Indian Prime Minister Narendra Modi was elected for the first time about five years ago, business and economic growth was on the very top of the agenda. Optimism rose, and so did the Indian stock market, though many are disappointed that the gross domestic product ( GDP) growth rate has been dropping for six quarters in a row. The consequences are visible, as the setback in the growth rates means unemployment has been rising throughout most of 2019, to cite one example.
A lower income tax-burden for middle-class households clearly aims to increase private consumption. This is not a bad idea, but because of the overall economic uncertainty in India, consumers are holding back on consumption, so the new initiated household spending boom might never take off, unlike that in the US, China and the Philippines.
The new fiscal budget also allocates more spending on agriculture and infrastructure development in rural areas, which also helps increase the income level locally. Again, a fine initiative, which I assess would help consumption there, though not enough to reverse decreasing GDP growth rates.
The last significant goodie in the new fiscal budget is the removal of a sort of second tax on corporate dividends that normally contributed around $3.5 billion in public revenues. No doubt the corporate sector is satisfied with this decision, though I am not convinced it would spur new and bigger investments in the that sector.
Based on the latest fiscal budget, some redistribution is bound to take place, but I am doubtful if the abovementioned changes can really lift the Indian economy. These initiatives are not reforms, just another redistribution. No wonder investors weren’t excited about the planned spending. However, if one gives preconditions for the government’s income, then the budget is truly
LUNDGREEN’S GLOBAL PERSPECTIVE worrying.
As usual, the government didn’t meet the deficit target last year either, which was 3.5 percent of GDP, but the reality ended at 3.8 percent. One should also bear the original target for the next fiscal year in mind, which was set at 3 percent of GDP, which has never been realistic. Apparently, the government has made the same conclusion, and therefore, the new budget deficit target is 3.5 percent of GDP for the coming year. New Delhi’s continued failure to meet own targets is, of course, not the best way to win investor confidence, which is a challenge for the budget. But looking into how Modi’s government plans to generate more income in the year, then even the most positive-thinking investor or financial market participant, must consider to give up trust in how the government plans to finance the budget.
Government borrowing will be increased from $70 billion to $75 billion next year. That will work, but without reform initiatives, it doesn’t represent any visionary part of a solution. The government plan to sell a range of public owned companies to generate one-off incomes worth $29 billion as a corporate tax reform from September last year also needs to be financed.
On the list of assets for sale, investors will, among others, find a stake in the Life Insurance Corp. of India, which might find a buyer, but I hardly believe that the loss- making airline company Air India would find a new owner at a significant price. The government dreams of realizing state- owned banks at a good valuation, but these institutions might be more well-known for needing a makeover before they become true gems.
The only certain income-generating initiative included in the new budget has not yet received any international attention. This is the increased import duties on a range of goods, which increases protectionism and basically hurts consumers. This is old-fashioned economic thinking far away from true reforms, and I conclude that nothing in the budget signals that India is moving toward becoming a more attractive investment destination for foreign investors.