Union Budget 2017: Modi reaps the reward of sparing Indians further pain

A halving of the tax bill for lower middle class, a 5 percentage point rebate for firms should go some way to help steady consumption and employment


Finance minister Arun Jaitley. Photo: Pradeep Gaur/Mint
Finance minister Arun Jaitley. Photo: Pradeep Gaur/Mint

Most Indians are getting a tax break, thanks to Prime Minister Narendra Modi’s botched demonetisation program.

A halving of the tax bill for the lower middle class and a 5 percentage point rebate for most companies should go some way to help steady consumption and employment, both of which were hurt by the 8 November ban on high-denomination cash.

Those cuts, plus a reduced capital-gains tax on property and a promised increase in affordable housing, lit up shares of real estate, cement and finance stocks after finance minister Arun Jaitley’s annual budget, which also managed to placate jittery bond investors with its restrained forecast for government borrowing next year.

In a nutshell, Modi will pare income and profit taxes, spend a record 3% of GDP on infrastructure, and yet keep the budget deficit unchanged at 3.2% of GDP in the fiscal year that starts 1 April. It’s possible that he’s overestimating the economy’s potential to spring back from the cash crunch. Or he’s expecting wonders from the uniform goods and services tax that will replace most indirect levies next year.

For now, though, investors are giving Modi the benefit of the doubt. The rupee appreciated by as much as half a percent. Asset managers are happy to be exempted from an indirect transfer tax, which would have sent many India-focused offshore funds packing.

Rupee’s post-Budget gain

As expected, Jaitley offered a mix of carrots and sticks to encourage digital payments, including a proposal to ban political parties from accepting more than $30 in cash donations. However, it isn’t immediately clear whether the budget will also revive stalled corporate investment and flagging credit. To some extent, a sensible fiscal policy and lower interest rates should help ease the pain for both overextended companies and undercapitalized state-run banks.

Given New Delhi’s resource constraints, it’s perhaps the least bad of available options. Bloomberg

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