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India unveils budget for recovery after cash crunch

Dhiraj Singh | Bloomberg | Getty Images

India is a "bright spot" in the world economy, Finance Minister Arun Jaitley said as he unveiled his annual budget on Wednesday, adding that the impact on growth from the government's cash crackdown would wear off soon.

"We are seen as an engine of global growth," Jaitley said as he delivered the opening remarks of his fourth budget.

Prime Minister Narendra Modi's surprise decision last November to scrap high-value banknotes worth 86 percent of India's cash in circulation has hit consumer demand, disrupted supply chains and hurt capital investments.

The worst of the cash crunch is now over and the government expects it to be fully cleared by the end of April. A private manufacturing survey on Wednesday showed business is slowly returning to normal.

Still, the finance ministry forecasts that growth could dip to as low as 6.5 percent in the current fiscal year to March, before picking up slightly in the coming fiscal year to between 6.75 and 7.5 percent.

That is below the target rate of 8 percent or more that Modi needs to create enough jobs for the 1 million young Indians who enter the workforce in India - a nation of 1.3 billion where half the population is below the age of 25.

While opinions vary on how long the disruptions caused by Modi's crackdown on untaxed and illicit wealth will last, there is near unanimity among economists that Asia's third-largest economy needs a helping hand.

Arvind Subramanian, Jaitley's chief economic adviser, on Tuesday advocated slashing personal income tax and accelerating cuts in corporate tax rates. He cautioned, however, against pursuing debt-fuelled fiscal expansion.

Still, economists are pencilling in a federal fiscal deficit of 3.3 percent of GDP for 2017/18. That would be higher than the 3 percent pledged earlier but lower than 3.5 percent that the government has budgeted for the year soon to end.

The rollout of a nationwide Goods and Services tax (GST), expected in July after years of delays, could also weigh on economic growth.

Countries that have introduced GST in the past have often faced a relative economic slowdown before the benefits of a unified tax regime feed through.

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