New DelhiPrime Minister Narendra Modi's government is expected to increase infrastructure spending and cut some personal taxes in the 2020/2021 budget to boost consumer demand and investment, government sources and economists said.
India is facing the worst economic downturn in a decade. Growth slowed to 4.5% from July to September, worsening the employment prospects for millions of young people entering the world of work every year.
Despite the cut in corporate taxes and the central bank's easing of monetary policy, investment has not picked up, adding to Modi's concern when he tried to suppress public protests against a new citizenship law.
Economists and investors say budgetary incentives for the year beginning April 1 and an increase in spending on roads, railways, and rural well-being could revive growth. The budget will be delivered to Parliament on Saturday.
A weak economy and the wave of protests against the government have increased the chances of fiscal incentives in the budget, said Shilan Shah, an economist with Capital Economics in Singapore.
"This would boost growth somewhat in the coming quarters and put bond yields under pressure," he said in a note.
This month, the International Monetary Fund has lowered its forecast for India's growth for the fiscal year ending March to 4.8% and its forecast for growth for the coming fiscal year to 5.8%. The central government is likely to miss its deficit estimates for a third consecutive year after revenue falls by nearly 3 trillion rupees.
Finance minister Nirmala Sitharaman, who will present her second full-year budget to parliament, could postpone the previous goal of reducing the budget deficit to 3% of GDP by 2020 by at least two years, government sources told Reuters.
This will be in addition to spending around $ 28 billion on extra-budgetary bonds as it tries to keep the deficit in check.
In a Reuters survey, economists predicted that the government would set a budget deficit of 3.6% of GDP for 2020/21, compared to 3.3% for the current year.
Sitharaman is expected to announce a budget plan to invest 105 trillion rupees ($ 1.48 trillion) in infrastructure over the next five years. In the meantime, she hopes to make India an economy of $ 5 trillion, compared to $ 2.8 trillion, government sources said.
Since its acquisition in 2014, Modi has increased government spending on roads, railways, airports and ports, and cut government subsidies.
The budget could spur privatization and set a target of 1.5 trillion rupees after far missing the target this year, sources said.
The government has already announced plans to sell the loss-making national airline Air India and oil retailer Bharat Petroleum Corp. Ltd along with several others for sale.
In order to boost domestic production, the budget is also intended to increase import duties on more than 50 goods, including electronics, electrical appliances, chemicals and handicrafts. The target is imports from China and other countries worth around $ 56 billion.
Domestic investors expect some relief from income tax rates after a cut in corporate tax rates in September last year.
Economists have warned the government about "window dressing" the household, saying it needs to clean up estimates of revenue and growth, as well as borrowing outside the household.
"We will closely monitor revenue assumptions to assess the credibility of the budget deficit target," said Sonal Varma, chief economist for India and Asia at Nomura.