India's finance minister Arun Jaitley on Saturday announced a budget aimed at high growth, saying the pace of cutting the fiscal deficit would slow as he seeks to boost investment and ensure that ordinary people benefit.
Jaitley, delivering his first full-year budget since Prime Minister Narendra Modi's landslide election victory last May, said growth would accelerate to between 8 and 8.5 per cent in the fiscal year starting in April. A pace of 7.4 per cent is expected for the current year.
"India is about to take off," Jaitley, 62, said early in his speech to lawmakers. "The world is predicting that this is India's chance to fly." He forecast inflation at 5 per cent by the end of the fiscal year ending March 2016, undershooting the Reserve Bank of India's 6 per cent target and creating room to cut interest rates. Annual inflation was 5.1 per cent in January.
Jaitley said he would stand by the fiscal deficit target for the 2014/15 fiscal year, which ends March 31, of 4.1 per cent of gross domestic product. But he pushed back by a year, to 2017/18, a deadline for cutting the deficit to 3 per cent of GDP. In 2015/16, the deficit will be 3.9 per cent of GDP, above the 3.6 per cent target inherited from the last government.
India's budget concentrates a year's economic policy making into a single speech, and the range of measures Jaitley announced included a monetary policy overhaul, a bankruptcy code and the creation of a public debt management agency. Reaping the benefits of low global prices for oil, India's main import, Modi's nationalist government says it is in a sweet spot with spare cash to modernize roads and railways without busting fiscal deficit and inflation targets.
Jaitley announced an increase of Rs 700 billion ($11.4 billion) in road and rail investments in next year and announced that the government would commission five "ultra-mega" generation projects to end chronic power shortages.
The government would seek to boost the efficiency of a rural job creation scheme that is India's costliest welfare programme. It would also boost direct welfare payments into bank accounts, and gradually replace benefits in kind.
An overhaul of economic data has propelled India to the top of the league of fast-growing major economies, and the current account deficit is projected to fall below 1 per cent next year, which would help stabilize the rupee and build up reserves.
But expectations for a further shift in expenditure from subsidies to infrastructure are sky high among investors who made India the best performing stock market in Asia after China last year on hopes Modi's government brings sweeping reforms to labour, tax and land laws
Steps to battle money stashed abroad
Jaitley unveiled a slew of steps to battle black money stashed abroad, including a new law that will entail rigorous imprisonment of up to 10 years and a penalty of 300 per cent on its perpetrators.
Those evading tax by sending money to foreign countries will not be allowed to approach the Settlement Commission too, Jaitley said. Two bills - one on illegal money stashed abroad and another to curb benami transactions within the country - are likely to be brought in the ongoing budget session of parliament, he said. The issue of black money, unearthing which was a major election promise of the Bharatiya Janata Party, figured prominently in Jaitley's speech.
Individual tax payers to benefit, no change in tax rate
While not changing the income tax rates or increasing the exemption limits for individuals, Jaitley proposed increasing the range of tax deductible investments/spend. Jaitley said the government was proposing to rationalise various tax exemptions and incentives to reduce tax disputes and improve tax administration. The proposals mentioned by the finance minister made clear the government's focus on enlarging the tax-exempt investments/spend. Jaitley said the proposals would result in tax deductions to the tune of around Rs 4,400 billion.
Jaitley said in order to encourage savings and to promote health care among individual tax payers, it was proposed to increase the limit of deduction on account of health insurance premium from Rs.15,000 to 25,000 - for senior citizens this limit is to be increased from Rs 20,000 to 30,000.
For senior citizens above the age of 80 years - who are not eligible to avail of health insurance - deduction will be allowed for medical expenses up to Rs 30,000.
Cut in corporate tax
Jaitley announced a 5 per cent reduction in corporate tax over next four years, abolished wealth tax and replaced it with an additional 2 per cent surcharge on super-rich individuals, while increasing service tax that will result in higher cost on a variety of services. With the levy of 2 per cent additional surcharge, the total surcharge on 'super-rich' individuals with an income of over Rs 10 million, becomes 12 per cent as against 10 per cent now. In the case of domestic companies having income between Rs 10 million and 100 million, it will be 7 per cent and 12 per cent for firms with income above Rs 100 million.
Raises defence budget
Jaitley announced a modest 7.9 per cent increase in defence spending for the fiscal year starting April 1, suggesting that it will move only gradually with the military's long wish list for fighter jets, ships and artillery. He said defence spending will rise to $ 40.07 billion and for the current fiscal year, the allocation was 2.29 trillion rupees, a jump of 12 per cent over the previous year.