Finance Minister Nirmala Sitharaman detailed for members of Parliament the spending plan for fiscal year 2021-22, which begins April 1, saying the Indian economy — Asia's third-biggest — needed bold action to emerge from a slump caused by the pandemic and related lockdowns. The government of Prime Minister Narendra Modi was seeking to counter spending deficits and borrowing that exceed forecasts, Sitharaman told legislators.
She also said the budget is meant to strengthen India's financial stability, including through the formation of a so-called bad bank, a company that will manage a growing portfolio of nonperforming loans held by private lenders.
The idea is that clearing toxic debt from financial firms' balance sheets will create room for new lending that will stimulate the country's economy, policymakers have said. The budget document and Sitharaman's speech offered few details about how the bad bank would work, although the minister said 200 billion rupees would be allocated to recapitalize state-run banks that also are saddled with bad loans.
"This budget provides every opportunity for our economy to rise and capture the pace that it needs for sustainable growth," the finance minister said in her speech.
The new expenses — including a 137% jump, to 2.35 trillion rupees, in health and social-services outlays over last year — will cause the Indian deficit to expand to a higher-than-expected 9.5% of the national economy in the current fiscal year, which ends March 31.
Sitharaman projected a fiscal deficit of 6.8% of gross domestic product for 2021-22.
India has the world's second-highest caseload of COVID-19, the respiratory disease caused by the coronavirus, after the U.S. It currently spends just 1% of GDP on health, which is among the lowest for any major economy.
"Progressively as institutions absorb more, we will invest more, taking a holistic approach to health," the finance minister said. "We focus on strengthening three areas: preventive, curative and well-being."
Nonetheless, the top-line number of nearly half a trillion dollars isn't much changed from the current-year budget, mainly because the new plan lacks major provisions to address unemployment, hunger and increasing pressures on agriculture and other parts of India's rural economy. The fast-expanding deficit, in fact, will force the Modi government to cut spending on some programs in the coming fiscal year, including a combined 10% on rural development and a related jobs guarantee program, roads and a pension plan for widows.
At the same time, mega-highway projects were announced for four Indian states, all of which have elections scheduled for May or June.
While no changes were made to the country's personal income tax, senior citizens were offered a benefit whereby those above age 75 will no longer have to file an annual return. Income tax return forms would be simplified, Sitharaman also said.
To help alleviate some of its deficit, the government plans to raise 1.75 trillion rupees from selling its stake in state-run companies and banks, including IDBI, an insurance company, and oil companies, according to the budget.
The yield on India's benchmark 10-year bond rose to 6.03% from Monday's low of 5.93% on the fiscal projections.
"Overall, the intent of the government is to widen the tax base, improve compliance, reduce litigation and curb harassment of taxpayers," Rajesh Gandhi, a partner with Deloitte Haskins & Sells LLP in Mumbai, India's financial hub, wrote in a note on his firm's behalf.
He said the budget, in the form of the finance legislation, would soon be placed before Parliament, where its passage is likely, and signed into law.
"It's a progressive and inclusive budget," Amit Singhania of Shardul Amarchand Mangaldas & Co., a law and consulting firm near the Indian capital, New Delhi, told Law360.
Singhania noted that the budget also calls for a "faceless" dispute resolution mechanism for individual and small-business taxpayers, whereby India's Income Tax Appellate Tribunal will conduct all proceedings electronically. In addition, the government decided to continue its reduced rate of tax deducted at source for purchases of goods as well as a rationalization of merger-and-acquisition measures.
"The focus of [the budget's] tax proposals has been to provide certainty and stability, and to increase the tax base," he said.
--Editing by Neil Cohen.
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