India likely to make reforms but no tax change in Budget

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Sumanta Dey Bangalore

India would probably unveil bold reforms in its Budget tomorrow in a bid to turn around an economy growing at decade lows, but major changes to taxes would be absent, a survey predicted yesterday.

Finance Minister Arun Jaitley will present his first Budget after his Bharatiya Janata Party, led by Prime Minister Narendra Modi, won in May to form the first majority government in three decades.

Expectations of the party’s win sparked a rally in Indian assets, with stocks soaring to records on Modi’s business-friendly image and hopes that reforms to boost economic growth will be swiftly implemented.

Seventeen of 24 economists surveyed between July 3 and 7 expect the 2014/15 Budget to live up to those expectations, even though the government is likely to increase its fiscal deficit target to 4.4 percent of gross domestic product.

It is already running at half the annual goal of 4.1 percent inherited from the previous government barely three months into the budget year. That will likely lead to higher borrowing of 6 trillion rupees (R1 trillion), 30 billion rupees more than the current target.

“It does look like the Budget will lay the groundwork for some important reforms,” economist Vishnu Varathan said. But he added that tax reform plans, including a goods and services tax (GST), would not be implemented for a while.

Increased spending on social welfare is commonplace in Indian budgets. But analysts say the tone of this budget will be different, steering clear of populist measures.

Most economists expect Jaitley to cut give-aways on fuel products to reduce India’s $40bn subsidy bill – a key reason for the wide fiscal deficit.

While the price of petrol is already decontrolled and tied to global market rates for crude oil, prices of diesel and cooking gas are still state regulated.

But cutting subsidies on food and fertilisers will be tough due to a poor monsoon to stem from the El Niño effect, which could drive prices higher.

Jaitley is also expected to cash in on soaring markets and sell stakes in major public firms to bridge the gap between revenues and expenditure.

The median consensus is for the divestment target to be raised to $11bn from $9bn. A government source said the finance ministry would raise up to a record $11.7bn through asset sales in its Budget.

A key concern stubbornly high inflation, which has steadily weakened the rupee’s purchasing power as well as dented consumer demand.

Economists said implementation of a nationwide GST would likely soften price rises by doing away with multiple layers of federal and state levies on products, although such an overhaul was not expected in this budget.

Sixteen of 27 economists did not expect any major tax reforms to be announced this week although the government was likely to give some details on implementation of the GST.

While the common tax has been on the agenda of the federal government for a few years now, differences with state administrations faced with the prospect of a revenue cut have stalled it from becoming law.

Also on the cards, according to economists, is a plan to announce a timetable for the introduction of a direct tax code to widen the income tax net, boost revenues and reignite India’s savings and investment rate. – Reuters


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