Budget 2018 misses deficit target, FM taxes stock investors to woo votes

India will miss its budget deficit targets as Prime Minister Narendra Modi looks to placate angry rural voters and create jobs before national elections next year. The government also ended a tax break on certain equity investments.

The budget shortfall will be 3.5 percent in the year ending March 31, Finance Minister Arun Jaitley told lawmakers in New Delhi Thursday, wider than the previous 3.2 percent target. The government will aim for 3.3 percent next year rather than its earlier 3 percent goal. Most economists in a Bloomberg survey had predicted 3.5 percent and 3.2 percent, respectively.

"We have taken up programs to direct the benefits of structural reforms and good growth to reach the farmers, poor and other vulnerable sections of the society and uplift the underdeveloped regions," Jaitley said. "This year’s Union Budget will consolidate these aims and particularly focus on strengthening agriculture and rural economy."

Bonds and the rupee fell after Bloomberg first reported on the deficit breach. Apart from higher spending on farmers, Jaitley also announced tax breaks for small companies but brought back a levy on stock gains as his government looks to offset revenue losses and hopefully create jobs. Unemployment is the biggest concern for Indians, according to a private survey conducted last month.

"In the background there have been a few election results that have not been exactly in favor of the ruling party. People may have been getting impatient in the terms of progress at their level," Chetan Ahya, chief Asia economist at Morgan Stanley, said in an interview with Bloomberg TV before the announcement. "So there is pressure on the government to do something, so that some of the progress is shared."

Details:

• India plans FY19 gross market borrowing at Rs 6.06 trillion 

• Profit exceeding Rs 100,000 ($1,565) from shares held for more than a year will be taxed at 10 percent

• Proposes to extend lower tax rates to specified small and medium-sized companies

• Aims for 800 billion rupee divestment target for FY19

• Proposes National Healthcare Mission to cover 100 million families, 500 million people

• Minimum guaranteed prices for specified crops to be set at 1.5 times production cost

• To spend 20 billion rupees to set up agriculture market fund; 100 billion rupees on animal husbandry infrastructure

• Proposes to liberalize export of farm commodities

• India Budget 2018: Winners and Losers

The main equity index fell as much as 1.3 percent before recovering to trade 0.4 percent higher as of 1:29 PM in Mumbai. The rupee weakened 0.2 percent to 63.74 a dollar and the yield on the benchmark 10-year bond rose six basis points to 7.49 percent.

Eye on Elections

Modi’s party faces as many as eight state elections this year after economic woes contributed to its worst showing in more than two decades in a vote in his home state in 2017. Then there’s the national poll early in 2019.

While the ruling party and its allies would still win a majority were elections held today, clear rumblings of discontent are visible below the surface, according to a survey by Lokniti-CSDS-ABP News last month. Support for the Modi-led alliance among farmers, traders and shopkeepers has fallen to 43 percent from 50 percent since May 2017 and most voters identified unemployment as being India’s biggest problem.

However, there’s little space for monetary stimulus after inflation breached the central bank’s target. The Reserve Bank of India will keep the benchmark repurchase rate at 6 percent on 7 February, according to most economists in a Bloomberg survey conducted before the budget announcement.