NEW DELHI: India’s finance minister pledged to raise defence spending as well as spending on the rural poor and halve the basic rate of income tax in his budget speech on Wednesday.

The defence spending received a boost of 6.2 per cent in Arun Jaitley’s speech. He proposed a defence budget of just over Rs2.74 trillion. The increase in the total defence outlay is down from the increase of about 11 per cent last year. The Budget 2016 allocation was 10.5 per cent over the allocation made for 2015-16. When taken without the pension component, the outlay for the coming year shows a 9.14 per cent increase over 2016-17.

In his speech, Mr Jaitley defended the so-called demonetisation exercise, saying it would increase revenues by forcing people to declare untaxed wealth, but conceded it had hit the economy and promised relief for the poor and middle classes ahead of key polls.

He pledged to double the income of farmers, who have been hard hit by the currency ban, in the next five years and bring 10 million households out of poverty by 2019.

He also promised more affordable housing for the poor and halved the basic rate of income tax to five per cent. “My overall approach while preparing this budget has been to spend more in rural areas, poverty alleviation through fiscal prudence,” Mr Jaitley said in a speech to parliament.

The finance minister said tax evasion had become India’s “new normal” as he laid out further measures to increase the number of people paying their taxes after last November’s currency ban. He said the rate cut was intended to reward those already paying income tax, and encourage more to do so.

The basic tax rate applies to those with annual incomes of between Rs250,000 and Rs500,000. “We are largely a tax non-compliant society. When too many evade tax, the burden falls on those who are honest,” Mr Jaitley said.

Analysts said the budget was in line with expectations that the government would target communities worst hit by the currency move, with elections beginning in the key battleground state of Uttar Pradesh later this month.

“That’s applying a balm to this segment, which is broadly the lower middle class and which has been more vulnerable to the cash ban,” said Sunil Sinha, principal economist at India Ratings & Research, referring to the tax cut. “This is what’s been the flavour of the budget — to reduce the pain of demonetisation.”

Mr Jaitley relaxed India’s 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-per cent deficit the following financial year.

He announced plans to spend a record Rs3.96 trillion on infrastructure including modernisation of India’s roads, airports and crumbling railways. That includes a trillion-rupee plan to improve safety on the railways after a slew of deadly accidents.

Mr Jaitley said India had undergone “historic reform” over the past year, but remained an “engine of global growth.

Published in Dawn February 2nd, 2017