India to raise capital spending in bid to boost jobs market
The Indian government is set to lift its capital spending annual budget to $550 billion, an increase of 33%, to boost economic growth and create jobs.
Announcing the move at the Annual Union Budget 2023, Finance Minister Nirmala Sitharaman said private investment was boosting the economy after the pandemic and the government was focusing on driving growth.
India’s economy is projected to grow 7% in the fiscal year ending in March. The government forecasts growth of 6%-6.5% next year.
In spite of this growth, the government is concerned about the unemployment figures ahead of next year’s general election in 2024. According to the Center for Monitoring Indian Economy, the unemployment rate stood at 8.3% in December, up from 6.5% in January 2022.
“The Budget makes the need once again to ramp up the virtuous cycle of investment and job creation,” Sitharaman said.
The government also announced it was aiming for a budget deficit of 5.9% of India’s GDP for the 2023-24 financial year, lower than the 6.4% for this fiscal year.
Despite worries that the world economy is headed for a slump, the finance minister she was confident the country’s future was bright. “India is on the right track,” she said.
The increased capital spending will focus on building new schools, airports, heliports and other infrastructure, with investment worth $122 billion. The Budget also extended a $24 billion scheme to provide free grains to vulnerable households for one year.
The government will also increase spending on providing affordable housing in urban centres by 66%, the minister said. She added that ‘green growth’ will be backed with a $4.3 billion investment in helping India meet its stated aim of going carbon neutral by 2070.
Also announced were new tax relief measures for middle-income earners. However, spending on India’s rural jobs programme was cut by 30%, a move criticised by opposition politicians.
India’s Prime Minister, Narendra Modi, said the Budget laid a “foundation for the aspirations and resolutions of a developed India”, adding that the government’s investment in infrastructure has increased by more than 400% since 2014 when he first became the country’s leader.
In the Budget, the government also announced changes to income tax, with taxpayers able to decide whether to opt for the new or the old income tax regime. Under the new income tax scheme, a person with an annual income of up to Rs 7.5 lakh (£7,500) can avoid paying any tax.
“Currently, those with income up to Rs 5 lakh do not pay any income tax in both old and new tax regimes. I propose to increase the rebate limit to Rs 7 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs 7 lakh will not have to pay any tax,” said Sitharaman.
With the standard deduction of Rs 50,000 now applicable to those in the new income tax regime, those with annual income of up to Rs 7.5 lakh are out of the tax net. The standard deduction was earlier available to only those who opted for the old income tax regime.
Interest rates set to be held
However, economists are predicting that the investment and tax cuts unveiled in the Budget will not stop the central bank , the Reserve Bank of India (RBI), from pausing interest-rate hikes.
The new tax rates are unlikely to add to inflationary pressures in the economy in the near-term, said economist Teresa John of Nirmal Bang Institutional Equities.
The inflation-targeting RBI is due to meet Feb. 8 to review policy settings, amid data showing price gains have returned within its 2%-6% target range since November. That’s not the only indicator policymakers will be tracking. The Federal Reserve had just downshifted to a quarter-point rate increase, although Chair Jerome Powell signaled a couple more moves before ending the tightening cycle.
“We believe that the RBI will continue to move toward a pause,” said John. “Even when GST was implemented, it was widely expected that it would be inflationary but on a net-to-net basis, the rate was lower and taxes didn’t lead to inflation,” she said, referring to the goods and services tax.
A Bloomberg survey of economists showed India’s policymakers are expected to wind down its most aggressive tightening cycle since 2011 after a 25-basis-point move this quarter.
“The RBI will take this budget as positive for domestic growth, both investment and consumption,” said Rahul Bajoria of Barclays Plc. “We think February will be the last hike.”
