India boosts spending on rural poor as cash ban bites

NEW DELHI (AFP) - India's finance minister pledged to raise spending on the rural poor and halved the basic rate of income tax in his annual budget on Wednesday (Feb 1), seeking to ease the pain of a shock move to ban high-value banknotes.

Arun Jaitley defended the so-called demonetisation, saying it would increase revenues by forcing people to declare untaxed wealth, but conceded it had hit the economy and promised relief to the poor ahead of key polls.

Jaitley promised to increase government funding for farmers, who have been hard hit by the currency ban, including by granting them a 60-day waiver on interest for agricultural loans.

He also promised more affordable housing for the poor and pledged to halve the basic rate of income tax for low earners to five per cent.

"My overall approach while preparing this budget has been to spend more in rural areas, poverty alleviation through fiscal prudence," Jaitley said in a speech to parliament.

He said the government would double the income of farmers in the next five years and bring 10 million households out of poverty by 2019.

The finance minister also laid out further measures to increase tax revenues after last November's currency ban, saying tax evasion had become India's "new normal".

"We are largely a tax non-compliant society. When too many evade tax, the burden falls on those who are honest," he said.

Prime Minister Narendra Modi's unanticipated decision removed around 86 per cent of India's available cash at a stroke, triggering massive queues outside banks.

The abrupt shortage of high-value notes hit businesses across the country, especially in cash-intensive sectors like agriculture, real estate and jewellery.

The government conceded on Tuesday that the fallout would hit short-term expansion in the world's fastest-growing major economy, but said it would ultimately help boost growth by reducing corruption.

With elections due in the key battleground state of Uttar Pradesh this month, analysts had predicted the government would try to offset the pain by cutting taxes and announcing spending to help the poor.

On Wednesday Jaitley said the government would slash the basic rate of income tax from 10 per cent to five per cent.

"The present burden of taxation is mainly on the taxpayer and the salaried employees who are showing their income correctly.

"Therefore post-demonetisation, there is a legitimate expectation of this class of people to reduce their burden of taxation," he told parliament.

"Also an argument is made that if nominal rate of taxation is kept at a lower slab more people will prefer to come in the tax rate."

The basic rate applies to those with annual incomes of between 250,000 rupees (S$5,225) and 500,000 rupees and will fall from 10 per cent to five per cent from April, he said.

Jaitley also said the government was well on the way to meeting its goal of bringing electricity to villages across the country by May 1, 2018.

The government relaxed its fiscal deficit target to 3.2 per cent for the financial year 2017/18, citing the increase in government spending, but said it would be back on track for a three-percent deficit the following financial year.

On Tuesday it had lowered its growth forecast for the 2016-17 fiscal year ending in March to 7.1 per cent, down from 7.6 per cent in the previous year, acknowledging the pain of its demonetisation scheme.

Jaitley said India had undergone "historic reform" over the last year but still remained an "engine of global growth".

Modi's government swept to power in 2014 on a promise to tackle corruption and bring about the economic reforms needed to increase growth and provide jobs for a rapidly expanding young population.

"Demonetisation is a bold and decisive strike in a series of measures to arrive at a new normal of bigger, cleaner and real GDP," he said.