India’s budget disappoints investors
It does too little to shore up the flailing economy and failing banksONLY A CRICKET match with Pakistan could have drawn as much attention. At 11am on February 1st every financier, investor and trader stopped what they were doing in order to watch Nirmala Sitharaman, the finance minister, unveil the budget. The stockmarket opened for a special Saturday trading session. Employees in banks’ trading and asset-management divisions, usually closed for the weekend, went into work.The stakes were especially high this year. The economy has floundered—the government expects GDP growth of 5% in the year to March 31st, the weakest since the financial crisis. An interim budget in the summer, after Narendra Modi’s re-election as prime minister, had flopped. The government then tried to revive animal spirits by sharply cutting corporate-tax rates. A wide fiscal deficit appeared to allow little room for a big spending increase. The stockmarket had been sagging in the weeks leading up to the budget, not helped by weaker markets worldwide.In the event, the budget disappointed. By the time Ms Sitharaman sat down after speaking for a record two hours and 40 minutes, too exhausted to finish her prepared remarks, markets had plunged by 3%. “A bloodbath”, was the blunt verdict of the Economic Times.Ms Sitharaman announced a number of measures, many of which appeared intended to simplify the tax system. Income-taxpayers can choose to shift from a complex system of higher rates and deductions to a lower rate without deductions. Those challenging past bills will be allowed to settle for the original amount, with no interest or penalty charges. Taxpayers will be protected from harassment by officials—often a cover for extortion. Levies on companies distributing dividends and on sovereign-wealth funds investing in infrastructure will be removed. Public spending on infrastructure and agriculture will rise.The government expects to fund these measures by selling some of its stakes in state-owned companies. In an attempt to protect Indian industry, import duties on consumer goods, such as footwear and furniture, will go up, while those on manufacturers’ inputs will fall.Such measures are unlikely to revive the economy much. Moreover, many are unimpressive on closer examination. The infrastructure plans will rely on uncertain public-private partnerships. Past attempts at divestment have fallen flat. Some of the tax measures add complexity rather than simplify. The airwaves were dominated by chartered accountants pondering the many possible consequences of the income-tax reforms (which will no doubt require seeking their professional advice). The abolition of the dividend-distribution tax will be welcomed by foreign investors. But those at home expect it to be offset by new taxes and add to already high rates.There was a big omission too. Many of the country’s publicly controlled banks, co-operative lenders and non-bank financial companies are in deep trouble. But the budget dashed hopes of a resolution. Ms Sitharaman announced an increase in deposit insurance, to soothe depositors’ fears of losing their savings. She said she would urge the central bank to allow small firms more time to restructure their loans, which suggests that both borrowers and lenders are in a bad way.The sheer number of provisions in the budget means businesses and investment firms will only gradually work out their consequences, both intended and unintended. More market reaction seems likely when play resumes on Monday.Reuse this contentThe Trust Project