Rural spending gets priority in India’s interim budget for 2019

The Indian government has announced a massive increase in spending for rural areas and projected the country to become a $5 trillion economy in the next five years.

In a bid to assuage voters unhappy with Prime Minister Narendra Modi‘s leadership and rising living costs, the government on Friday announced a basic annual income for farmers, benefits for workers in the unorganised labour sector and tax exemptions for the middle class as part of its last interim budget, presented months before general elections.

Among the important announcements in the federal budget were big-ticket farm giveaways, with a major farm income support scheme costing 750 billion rupees ($10.5bn) and tax cuts for the middle class.

Piyush Goyal, India‘s acting finance minister, presented the budget in the absence of Finance Minister Arun Jaitley, who is on medical leave.

Spending on rural areas

The government will allocate 600 billion rupees ($8.4bn) a year for farmer income, Goyal said.

The ruling Bharatiya Janata Party (BJP) is aiming to shore up support among voters in rural areas, where two-thirds of India’s 1.3 billion people live, with plenty of measures announced to boost the rural economy.

The government also said it would spend 190 billion rupees ($2.6bn) for the construction of rural roads.

Goyal announced handouts of 6,000 rupees ($84) each year for small farmers owning less than two hectares of farmland. The government says this would aid 120 million farm families and would be directly transferred to bank accounts of farmers.

“Under the Pradhan Mantri Kisan Samman Nidhi, 6,000 rupees per year for each farmer, in three instalments, to be transferred directly to farmers’ bank accounts, for farmers with less than two hectares landholding,” Goyal told the lower house of parliament.

The acting finance minister said the government would provide up to five percent interest subvention to farmers hit by natural calamities. The government also proposes to provide two percent interest subvention for farmers pursuing animal husbandry and fisheries.

This budget is a clear sentiment changer, at least among the middle class.

— sukumar ranganathan (@HT_Ed) February 1, 2019

The government projects a 2018-19 fiscal deficit of 3.4 percent of gross domestic product (GDP), Goyal said, slightly above its 3.3 percent target.

“This is the second consecutive year that the budget discipline appears to have been lost,” said Prakash Sakpal, Asia Economist at ING in Singapore. “This doesn’t come as a total surprise given that this is the election year and the government is poised to do as much as it could in a bid for reelection. This package of 750 billion rupees ($10.5bn) is a bit above what we expected but it just goes to tell you that this is a vote seeking thing.” 

Goyal also announced plans to provide a pension of 3,000 rupees ($42) each month for unorganised sector workers over the age of 60. The scheme would cover 100 million workers in India’s unorganised sector.

In a move aimed at shoring up support among India’s middle class, Goyal announced a full tax rebate on annual income up to 500,000 rupees ($7,030), as ruling party MPs, including the prime minister, thumped their desks in the lower house in approval.

Anticipating a “favourable” budget, India’s financial markets rose steadily on Friday morning.

The domestic stock market registered strong gains as the S&P BSE Sensex surged as much as 449.72 points, while the Nifty50 barometer of the National Stock Exchange rose by 127.8 points on Friday afternoon.

First farmers, then unorganised sector, then govt employees, now MSMEs… This Budget speech is divided into vote banks more than anything else #InterimBudget2019

— Mihir Sharma (@mihirssharma) February 1, 2019

The new announcements come as India enters an intense political season with what are expected to be keenly fought general elections.

Growing rural distress and a resultant set of shock defeats in recent state elections have put pressure on the government to expand social spending.

Lack of jobs

“The biggest problem in India today is that we have record unemployment,” Mohan Guruswamy, a former economic adviser to the federal government, told Al Jazeera. “There’s no mention of that today. The only way you can address unemployment is by increasing capital expenditure. Capital expenditure allocated by the government in this budget is 3.36 lakh crores (3.36 trillion rupees or $47bn), about two percent of the GDP. This does not help at all.”

The BJP, which has been in power with its allies since 2014, has not made good on promises to create jobs for 10 million young people each year.

On Thursday, Indian daily the Business Standard reported that an official survey withheld by the government shows India’s unemployment rate in 2017-18 rose to its highest level in at least 45 years.

More than 900 million people will be eligible to cast votes in the Indian elections due by May, the world’s biggest ever democratic exercise.

In previous votes, political parties have been rewarded with electoral success on the back of welfare schemes for the poor and subsistence farmers.

“The budget really covers all the key segments, the voter classes, that would decide the fate of the Modi government,” said Charu Chanana, deputy head of Asia Research at the Singapore-based Continuum Economics. “But then, of course, we still are dealing with the impacts of the unpopular demonetisation programme and the implementation of the GST which is what led to the decline of the popularity of Prime Minister Modi.”

“So I think it’s a good response to some of the opposition claims that they made in the recent weeks about launching a universal basic income if they were voted into power. So It’s a good response on that front. But I think it’s a risky game,” she added.