Asia Economy

What to expect from India's 2020 budget this week

Key Points
  • India's finance minister, Nirmala Sitharaman, is set to present the country's annual budget on Saturday for the fiscal year that starts on Apr. 1.
  • After slashing corporate taxes last year, analysts agreed that Saturday's budget may adjust the personal tax brackets that would give consumers more disposable income to spend.
  • India is likely to strengthen already announced measures designed to help farmers and step up efforts to improve the rural economy. 
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India to release 2020 budget amid growth challenges

India's finance minister, Nirmala Sitharaman, is set to present the country's annual budget on Saturday for the fiscal year that starts on Apr. 1.

The budget comes at a time when India is trying to get its growth back on track and create enough jobs for its workforce. Last year, economic output expanded at 4.5% in the three months that ended in September — the slowest quarterly expansion in six years.

More recently, the International Monetary Fund lowered India's growth projection for this year by 1.2 percentage points from its October forecast — the fund expects Asia's third-largest economy to grow by 5.8% in 2020, behind China's projected growth of 6%.

This will be Sitharam's second budget presentation since her appointment to the government last year. The plan is expected to outline plans that can help the economy get back on track by reviving consumption and giving struggling sectors — like real estate and power — a boost.

Here's what to expect from India's budget.

Personal income tax changes

After slashing corporate taxes last year, analysts agreed that Saturday's budget may adjust the personal tax brackets that would give consumers more disposable income to spend.

The current tax brackets apply to the following annual income:

Up to 250,000 rupees ($3,502) — no tax
Between 250,000 to 500,000 rupees — 5% tax
Between 500,000 to 1,000,000 rupees — 20% tax
Over a million rupees — 30% tax

DBS Group economist Radhika Rao said India could either raise the minimum taxable income, or introduce a different tax rate for higher-income earners. "To cushion the impact on collections, these tweaks might be accompanied by rationalization in tax rebates," she wrote in a note.

Economists highlighted that income tax changes alone may not be sufficient to reverse India's slowing growth as only a very small percentage of the population pays income tax. There is also a risk that consumers may choose to use the tax cut to increase their savings instead of spending that additional income, Citi economists said in a note.

Lowering or abolishing long-term capital gains tax

Some economists have said they expect the new budget to either lower or abolish the long-term capital gains tax, which was introduced in 2018. Under that measure, the government imposed a 10% levy on any profits exceeding Rs. 100,000 from shares held for more than a year. Lowering or doing away with that measure could, theoretically, improve investor sentiment towards the Indian market.

Boosting the rural and agricultural economy

India is likely to strengthen already announced measures designed to help farmers. That includes an income support program for farmers that pay 2,000 rupees per family every four months, and other measures such as farm insurance, and health and pension schemes, according to DBS Group's Rao.

Social sector measures including a sustained push toward providing electricity to households in villages, improving the availability and quality of health care and education, as well as efforts to develop skills are also expected, she added.

Economists at Citi said one crucial issue to address would be the rural, non-farm economy "which is hurting from a growth slowdown and efforts to formalize the economy." Many small business owners have been adversely affected due to the government's previous reform efforts.

Reaffirm focus on infrastructure spending

Late last year, Sitharaman introduced the ambitious National Infrastructure Pipeline plan that would see India invest 102 trillion rupees in various infrastructure projects in the next five years. Financial contributions to the plan are set to be borne by the central government, state governments, and the private sector, and would be initially focused on projects in sectors such as power, railways, urban development, education and health, local media reported.

More details on financing those infrastructure projects presented in the budget could improve investor confidence in the overall plan, according to DBS Group's Rao.

Citi economists said they expect higher capital expenditure allocations to be made to the plan.

Fiscal deficit target

Despite a slowdown in growth, inflation in India has steadily ticked up in recent months — prompting the central bank to pause its rate cuts in its last meeting. Economists agreed that the government faces a difficult task of trying to boost demand, while ensuring it remains on track to meet its medium-term fiscal deficit targets.

For the current fiscal year ending in March 2020, economists expect the government to miss its fiscal deficit target of 3.3% of GDP due to lower revenue collection from the stimulus measures.

Citi economists predict that fiscal 2021 would be another year of "significant revenue uncertainty" for the central government amid disappointing revenue collection from taxes in the current year, as well as challenges in selling or liquidating unprofitable state-owned companies.