Indian Finance Minister Nirmala Sitharaman on Friday presented the first annual budget of the second term of the Narendra Modi government. With the country facing weakening growth and a drop in investment, the minister has said the government will bring in structural reforms to kickstart foreign and domestic investment.

However, the minister’s budget announcements did not find much favor with the markets, as both the Bombay Stock Exchange Sensex and the National Stock Exchange Nifty indices ended on a losing note on Friday due to selling pressure.

A recent report by the Center for Monitoring Indian Economy (CMIE) stated that investment in new projects had plunged to a 15-year low in the quarter ending in June.

Under the proposed budget, the federal government would invite suggestions for further opening up of foreign direct investment in the aviation, media, animation, single-brand retail and insurance sectors in consultation with all stakeholders. The local sourcing norms for FDI are to be eased for the single-brand retailing sector.

To encourage overseas Indians to contribute toward Indian markets, the government would provide non-resident Indians seamless access to India equities, merging the NRI portfolio investment route with the foreign-portfolio investment route.

Banking

To shore up the finances of state-owned banks, Sitharaman announced that the government would provide 700 billion rupees (US$10.2 billion) for credit improvement. She said financially sound non-banking finance companies would continue to get funds from banks and mutual funds.

Global ratings agency Moody’s Investors Service said the recapitalization proposal would support growth by encouraging the flow of credit to the economy, but warned that such a move would add to government debt.

Infrastructure

To boost overland connectivity, 125,000 kilometers of road will be upgraded over the next five years at a cost of 802.5 billion rupees ($11.7 billion). The government will also undertake a restructuring of the National Highways Program, creating a National Highways Grid. It also plans to use rivers for cargo transport as that would help decongest roads and railways.

The government says it will also launch a railways modernization program this year and the Railways Department will be encouraged to expand suburban networks. Railway infrastructure would need an investment of 50 trillion rupees ($730 billion) between 2018 and 2030. The government will take the public-private partnership route to bring in faster development and delivery of passenger and freight services.

The government will undertake strategic divestment of state-owned airline Air India and other loss-making state-owned enterprises this financial year. It will also consolidate some of the state-owned enterprises through mergers and raise foreign shareholding limits in them.

However, it should be noted that the government has been struggling to disinvest the ailing Air India for long. All its plans to find a buyer have so far been unsuccessful.

Markets

The corporate tax on companies with turnover up to 4 billion rupees ($58.4 million) has been reduced to 25%. As part of the government’s focus on bringing micro, small and medium enterprises into the formal economy’s fold, a payment platform for MSMEs will be set up.

Going forward, listed companies may need to maintain 35% of minimum public shareholding from the current 25% and market watchdog the Securities and Exchange Board of India will be asked to bring in the changes. While this move will ensure more public investment in equity markets, it will also force corporates to go on a public offering spree.

This announcement spooked the markets. The BSE Sensex plunged 395 points on Friday after the budget proposal of raising the public shareholding threshold stoked fears about liquidity in the market. Similarly, the 50-share NSE Nifty sank 135.60 points or 1.14%, to 11,811.15.

Income tax

The income-tax rates for various income segments remain unchanged from the interim budget announced on February 1, but to boost the availability of affordable housing, the government has announced additional an income-tax deduction of 150,000 rupees on interest paid on home loans. This benefit will be available for affordable housing loans until March 2020. This will be applicable for home-loan value up to 4.5 million rupees.

Currently, interest paid on home loans qualify for a 200,000 rupee deduction. The government also announced a 150,000 rupee additional income-tax deduction on interest paid on loans for the purchase of electric vehicles.

With an aim to simplify tax administration and bring greater transparency, the finance minister has proposed inter-changeability of the permanent account number of income-tax payers and Aadhaar, the unique identification number issued to Indian citizens. Those who don’t have permanent account numbers can file income-tax returns by quoting their Aadhaar numbers.

Welfare measures

The government reiterated its commitment to ensuring India’s water security and providing access to safe drinking water to all sections of the society. It pointed out that 96 million toilets had been constructed since 2014. More than 560,000 Indian villages and 95% of cities have become open defecation free.

Sitharaman stated that the government aimed to achieve housing for all by 2022. It also plans electricity and clean cooking facilities for all Indian families by 2022.

Defense

Interestingly, the financial outlay for defense was not mentioned in the finance minister’s speech. In the earlier interim budget, the government allocated a little over 3 trillion rupees ($43.81 billion) for the defense budget (excluding pensions).

Education

The finance minister announced that there will soon be a new education policy and that higher education will be reformed comprehensively to improve outcome drastically. She said the allocation for education for 2019-20 would be more than three times the revised estimates. Efforts will be made to bring in foreign students under a Study in India plan, she said.

She said the government would make renewed efforts to promote research in the country, and announced that the different research grants given will be assimilated going forward. However, this has raised concerns of more centralization and conformism. Journalist Mihir Sharma has tweeted: “All government research grants to come under a single agency. Sounds good? Perhaps not. More centralization, less diversity, and perhaps saffronization….?”

‘No bold steps’

Columnist Swaminathan Aiyar has said there was nothing grand in Nirmala Sitharaman’s first federal budget. He expressed surprise that the finance minister didn’t even mention the fiscal deficit target, which the market was eagerly looking for. “Is there something to hide in it?” Aiyar told Economic Times. He termed it an “incremental Budget.”

“No bold steps. No visionary things. Maybe I should call it a supplementary budget,” he remarked.

Moody’s has opined that achieving the “competing budgetary goals” of lower fiscal deficit, higher growth and larger income support to farmers and the other needy sections of the society will be challenging. Despite the income support measures announced in the budget, the Indian economy is likely to grow more slowly and there is an additional risk of the fiscal deficit target of 3.3% being missed if tax collection underperforms.