Economic growth in India has slowed and the Modi’s government estimates that GDP growth for the fiscal year 2020 will be 5.0%. If true, this will be the lowest growth rate in eleven years. The drop in GDP contrast with other such as Finance Minister Nirmala Sitharaman who has stated in February that he believes growth would pick up to 6.0-6.5% this year. Part of the problem is the fiscal austerity India has been adhering to, which needs to be altered. This has been reflected in the new budget the government put forward for the next fiscal year which begins in March.
Tax Cuts to Help Buoy Growth
To help spur on economic growth the Indian government in September announced at tax cut. Indian GDP has declined from 8.1% in the first quarter of 2018 to just 4.5% in the third quarter of 2019. Mounting job losses have left low-income families the worst affected. India’s unexpected tax cut should buoy spending but will erode the revenue the government needs. Indian Finance Minister Nirmala Sitharaman announced back in September that Indian corporations will be taxed at an effective rate of 25.17%. The Indian government has estimated that the estimated lost tax revenue would be $20.5 billion or approximately 0.7% of India’s GDP.
Will the Budget Work?
The fiscal budget which was announced in early February by finance minister Nirmala Sitharaman is geared to enhance spending by cutting taxes on lower-middle class families and corporations. It is also set up to help farmers with an increase of about 13% cent in rural spending. Farmers have been struggling in India due to heavy rains that were generated out of the monsoon during the 2019 harvest season. The monsoon destroyed approximately 25% of the crop which included many of the exported crops such as organic soybeans and other pulses.
The budget is also geared to enhance lending to India by opening up its bond market to foreign investors. To buoy revenue, there is also a proposed sale of $30 billion of public assets, to help balance the books. The fiscal deficit is expected to increase to 3.8% of output, above the 3.3% target. The opposition to a sale of $15 billion worth of public assets last fiscal year suggests the target will not occur.
Inflation Surges as Food Prices Rise
India is also facing significant inflation which can make the purchase of normal goods and services arduous. Retail inflation increased to the highest since May 2014, pushed up by expensive food items and higher telecom tariffs. According to the Ministry of Statistics, the Indian Consumer Price Index inflation rose to 7.59% in January 2020 compared to 7.35% in December 2019. Inflation in food and beverages rose to 11.8%.
Vegetable prices also surged. Inflation in that category rose to 50.19% in January. Other key food items such as cereals, meat, and pulses rose. Outside the food and beverages category, inflation in transport and communication rose to 6.08% percent from 4.77% in December. Core inflation also rose significantly. The biggest jump was in the transport and communication segment, which rose to 6.08%.
Growth in India has declined substantially, and the Modi government is attempting to buoy economic growth with tax cuts and a fiscal budget that focuses on bringing in revenue. A public sale of $30 billion will likely be a point of interest that will create backlash. Inflation has also surged, making it difficult for rural communities to purchase food and beverages. The combination of lower growth and higher inflation is not the direction the government want the economic to experience.