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India relaxes fiscal deficit, cuts taxes to spur growth

Changes part of the country’s annual budget

By AFP - Feb 01,2020 - Last updated at Feb 01,2020

MUMBAI — India relaxed its fiscal deficit target on Saturday, raising spending and slashing taxes as it seeks to attract foreign investment and increase consumption in the wake of a prolonged economic slowdown.

Finance Minister Nirmala Sitharaman announced the changes as part of the country's annual budget in parliament, a day after official data showed that Asia's third-largest economy grew 5 per cent last year, its slowest expansion since the 2008 global financial crisis.

In a three-hour speech, peppered with references to ancient Indian history and poetry, Sitharaman said the fiscal deficit target for the current financial year was now 3.8 per cent of the gross domestic product (GDP), up from an earlier 3.3 per cent.

It will edge down to 3.5 per cent next year, she added. 

Prime Minister Narendra Modi's right-wing government has been trying desperately to revive the economy, which has flagged for several quarters, with per capita consumption falling for the first time in four decades.

The finance minister said Indians earning under 1.5 million rupees ($21,000) a year could pay lower taxes if they agreed to forego existing exemptions, with a view to raising their purchasing power.

Indian taxpayers are allowed to claim exemptions for a range of expenses, from medical insurance to vacation spending, under a labyrinthine tax regime that Sitharaman has vowed to simplify during her tenure.

She also announced that companies would no longer have to pay dividend distribution tax, terming it a "bold move meant to attract foreign investors".

"Wealth creators will be respected in this country... and this government assures taxpayers they will not be harassed," she said in her second budget speech since Modi won a landslide reelection last May.

The key agriculture sector will receive a cash infusion of 2.83 trillion rupees to help farmers set up solar power units and storage facilities. 

Sitharaman said this would enable farmers, many of whom are burdened by crushing debts, to sell power to energy companies.

She also revealed New Delhi was seeking to shed its 100 per cent stake in the country's largest insurer, Life Insurance Corporation, to generate revenue. 

Earlier this week, the government also announced plans to sell its 100 per cent stake in debt-crippled national carrier Air India after an earlier push to sell part of the airline found no takers.

Experts say India's state-run companies, which manufacture anything from bicycles to condoms, are a major drag on the economy due to their unprofitability, barring the government-owned enterprises in the coal sector. 

New Delhi has said it expects the economy to recover soon, pegging growth at 6 to 6.5 per cent for the financial year 2020-21.

But analysts and opposition politicians said the budget was too piecemeal and failed to offer a clear roadmap for a possible revival.

"There is nothing dramatic or substantially new in the budget," said Ashutosh Datar, an independent economist from Mumbai.

"Given how constrained its finances are, government did not have fiscal legroom to maneuver," he told AFP.

Rahul Gandhi, former leader of the opposition Congress party, told reporters the budget was devoid of "any concrete strategic ideas" to tackle unemployment, which is at a four-decade high. 

"It describes the government quite well. Lot of repetition, rambling and all talk but nothing happens. The country is of course suffering and youngsters feel they don't have a future," he said. 

Investors also appeared unimpressed, with Mumbai's Sensex index closing around 2.5 per cent down after Sitharaman's speech.

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