World Economy

India's finance minister just announced plans for a bigger deficit than many expected

Key Points
  • India will focus on its rural and agricultural economy in the coming fiscal year, Finance Minister Arun Jaitley said at his fifth annual budget presentation to parliament.
  • He said India is now "firmly on course" to achieve a growth rate above 8 percent, but did not indicate a timeline.
  • Jaitley also announced that India's budget deficit for fiscal 2019 is expected at 3.3 percent of GDP, higher than the recommended 3 percent in an earlier road map.
An Indian farmer carries sugarcane to load on a tractor to sell it at a nearby sugar mill in Modinagar in Ghaziabad, some 45km east of New Delhi, on January 31, 2018.
Prakash Singh | AFP | Getty Images

India will focus on strengthening its rural and agricultural economy in the coming fiscal year, Finance Minister Arun Jaitley said on Thursday.

Jaitley is presenting his fifth annual budget to lawmakers in New Delhi. This budget assumes more importance that usual because of a general election next year.

"We have taken up programs to direct the benefits of structural reforms and good growth to reach the farmers, poor and other vulnerable sections of our society, to uplift the underdeveloped regions," Jaitley said in his opening remarks to the Indian Parliament.

"This year's budget will consolidate these gains and particularly focus on strengthening agriculture and rural economy," he said.

The finance minister added that the government will concentrate on the "provision for good health to economically less privileged, taking care of senior citizens, infrastructure creation and working with the states to provide more resources for improving the quality of education in the country."

Jaitley also said that in the second half of the ongoing fiscal 2018 that ends Mar. 31, India expects to grow between 7.2 to 7.5 percent. "We are now firmly on course to achieve a high growth of 8 percent plus," Jaitley added, but he did not indicate a timeline by when that number would be reached.

Prior to Thursday's announcement, economists broadly expected measures focused on India's rural sector. One market watcher said the "malaise" among farmers ran deep following two years of drought that bit into profits.

Last year, Prime Minister Narendra Modi's Bharatiya Janata Party won the local elections in his home state of Gujarat but lost its footing among the state's rural population. In a recent interview, Modi said it was a priority for the government to help distressed farmers.

That led many to speculate that the budget would be aimed at winning back rural voters ahead of the next general election.

"My government is committed to the welfare of the farmers," Jaitley told the parliament on Thursday. "For decades, the country's agricultural policy and programs has remained production-centric."

He added that the Modi government wanted to double farmers' income by 2022 when India celebrates its 75th year of independence.

Arun Jaitley, finance minister of India
Prashanth Vishwanathan | Bloomberg | Getty Images

"Our emphasis is on generating higher incomes for farmers. We consider agriculture as an enterprise and want to help the farmers to produce more from the same land parcel at lesser cost and simultaneously realize higher prices for their produce," Jaitley said.

He added there'd be an emphasis on generating productive and gainful employment for farmers and landless families.

The minimum support price for all crops would be increased to at least 1.5 times that of the production cost, Jaitley announced. That is the level at which the government would buy crops from farmers, regardless of the market price.

India widens its budget deficit

Jaitley also announced that for the current fiscal 2018, India's budget deficit exceeded the government's initial target of 3.2 percent of GDP.

He said the government expected the deficit to be the equivalent of 3.5 percent of GDP. The central government, Jatiley explained, will receive indirect tax revenue for only 11 months in the current year and there will also be a "shortfall of non-tax revenue" due to certain developments.

That said, market watchers have been anticipating what Jaitley would say about the budget deficit in the coming year.

"I am projecting a fiscal deficit of 3.3 percent of the GDP for 2018/2019," the finance minister said on Thursday afternoon, after announcing billions of dollars in agricultural, infrastructure and social spending measures.

Economists had expected the budget deficit target to be set at 3.2 percent, according to a Reuters poll. Per India's fiscal consolidation road map, the recommended target for a deficit is 3 percent of GDP.

Experts previously warned that if India's growth disappoints in fiscal 2019, it could create new political and economic pressure on the government ahead of the elections.