India’s 2018 budget aims to lift millions of rural farmers and workers out of poverty

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Hundreds of millions of poor rural Indians will be helped out of poverty, under plans announced by Narendra Modi’s government – spreading the benefits of the impressive performance which the Indian economy is experiencing.

More Indian homes will be connected to the electricity network, farmers will see a steep rise in the selling price of their produce and poor families will be credited with approximately $7,500 (£5,300) of free healthcare, according to the finance minister, Arun Jaitley, who has announced the latest Union (national) Budget. 

Growth in the Indian economy is expected to outstrip that of China over the next two years at least, Mr Jaitley said and the range of populist measures is deigned to demonstrate that the ruling BJP is committed to a more equitable distribution of the fruits of India’s emergence as a leading global economic power. 

Indian GDP, said Mr Jaitley, would grow by between 7 and 7.5 per cent in 2018, which is, if anything a little below independent economic forecasters. Such growth would probably see the Indian economy become larger than the UK’s next year, pushing the former colonial power into 7th place in the global economic rankings. 

The International Monetary Fund recently projected that India would grow at grow at 7.4 per cent in 2019 and 7.8 per cent in 2020. If achieved, this would leave India as the fastest growing of the major world economies. It will be especially gratifying that China is expected to grow at 6.8 per cent and 6.4 per cent across 2019-20.

The Indian government is confident that recent currency and tax reforms will underpin the nation’s economic renaissance – and a deregulation of the farming sector that should increase prices and agricultural incomes, especially for India’s many small and poorer farmers. Around a half of India’s 1.3 billion population live on less than the equivalent of $3 a day.

With one eye on a federal election expected next year, Prime Minister Narendra Modi’s government is also implementing a series of other measures to strengthen the BJP’s appeal in rural areas, where it trails the Congress Party. Thus, Mr Jaitley has launched a health protection scheme for 100 million poor families, providing free hospital car of up to 500,000 rupees ($7,500) per person.

Some 80 million women would be given free connections for liquefied cooking gas, at a cost of about $45 per home and a further 40 million poorer families will be connected to the electricity grid free of charge. For the rich, capital gains tax will be brought in at 10 per cent for profits made in India’s booming stock markets.

In all, $15.7bn will be spent on rural infrastructure and poorer households and raising the price of rice and other crops. Farming remains an important sector of the Indian economy, representing a quarter of GDP.

Despite the relatively robust performance for Indian GDP in the medium term, a recent slowdown in growth has left the Government unlikely to reach its targets to reduce state borrowing and the national debt. The fiscal deficit for this year is projected to remain at 3.5 per cent of GDP, against a planned figure of 3 per cent of GDP.

To accommodate the latest spending pledges, the loosened fiscal deficit target for 2018-19 is 3.3 per cent of GDP. Higher growth plus a planned $16bn sale of state assets will support the mildly expansionary fiscal stance.

Pablo Shah, an economist with analysts CEBR in London commented: “India’s economy is likely to perform well in 2018, as external demand remains strong and the country begins to reap the benefits of major structural reforms. The looser fiscal stance signalled by today’s budget will act as an additional tailwind for growth in the near term. Cebr expects India’s economy to bounce back in 2018, growing by around 7.9 per cent in real terms.”