Finance minister Arun Jaitley is likely to unveil several steps to spur investments as the government seeks to boost economic growth and accelerate job creation when he presents the federal budget on 1 February, the last full-year one before general elections are due in 2019, a person familiar with the development said.
The government will allocate more funds for infrastructure and rural development, and offer sops for politically important constituencies such as the middle class, farmers, and small and medium enterprises, the person said, requesting anonymity.
Jaitley is likely to accord priority to projects related to affordable housing, rural roads and railways that could quicken the pace of economic growth as well as create jobs, said a government official, who also requested anonymity. Building rural infrastructure will be among the government’s top priorities given widespread farm distress and upcoming elections to eight state assemblies.
The Indian economy, Asia’s third largest, is forecast to expand 6.5% in the year to 31 March, the slowest pace in at least four years, partly the result of demonetization and implementation issues related to the goods and services tax (GST).
The government may also provide incentives to the logistics sector, including industrial parks, cold chains and warehousing facilities and significantly raise allocations for infrastructure projects such as Bharatmala, the new umbrella programme for the highways sector that focuses on optimizing efficiency of road traffic across the country by bridging critical infrastructure gaps through economic corridors and feeder routes.
Economists say that with private sector investment activity yet to see a significant pick-up, the government is likely to step up public spending in the economy despite the risk of breaching the fiscal deficit target.
India is targeting a fiscal deficit of 3.2% in the current fiscal year and 3% in 2018-19.
New investment proposals, an indicator of economic activity, have been falling for the past few years, data from CMIE shows.
It fell to around Rs8.2 trillion in 2017 from Rs14.5 trillion of new proposals in the previous year, Rs15.3 trillion in 2015 and Rs16.2 trillion in 2014.
The government may not adhere to the 3% fiscal deficit in 2018-19 and may use the additional fiscal space to increase its expenditure in key sectors, said Anubhuti Sahay, head, South Asia economic research (India), Standard Chartered Bank.
“The finance minister has a challenging task of striking a right balance between supporting growth and restoring investors’ confidence in the government’s commitment towards fiscal consolidation. We believe after a temporary slippage in FY18 fiscal deficit, the government will target a narrower deficit next year but not all the way to 3% as mandated by the fiscal consolidation path," she said. “The additional space can provide support to growth and can take the form of tax relief, increased rural and infrastructure spending."
She added that private investment is likely to pick up only in 2019 rather than in the current year as the economy is yet to fully align with the GST framework and the clean-up of banks’ balance sheet will be a gradual process.
Given the turnaround in the growth momentum, the FY19 budget may focus on construction, infrastructure, housing and manufacturing, D.K. Srivastava, chief policy adviser, EY India said in a 25 January note.
“These sectors are not only job-intensive and have the capacity to absorb both skilled and non-skilled labour but also have strong multiplier effects as they create demand for sectors such as cement, electricity and financial services," he added.