Congress’ president, Rahul Gandhi, recently said income tax would not be increased to implement the scheme, according to local media reports. In its election manifesto, Gandhi’s party also outlined other social sector schemes including farm loan waivers and higher spending on education that the party says it would pursue if it wins the elections.
That “runs counter to plans to keep within fiscal and revenue deficit goals,” Radhika Rao, an economist at DBS Group, told CNBC. “This implies that either public (capital expenditure) commitments might have to be scaled back or fresh revenue generating measures are required to fund additional funding requirements.”
Since raising taxes in the current economic environment would likely be an unpopular move, Congress may have to rely on non-tax revenues such as divestment of public assets, said Priyanka Kishore, head of India and Southeast Asia economics at consultancy Oxford Economics.
“I’m sure they’re going to tap the (Reserve Bank of India) for more dividends,” she told CNBC. Last year, the RBI board decided to form an expert committee to look into how much the central bank should hold in its reserves amid New Delhi’s push to access the surplus. “If that committee comes out with a certain recommendation, I don’t think Congress is going to shy away from taking that additional cash.”
If no new funds are raised, and a Congress-led government opts to dip into its normal budget, then that could cut into the country’s spending on public infrastructure, according to Sonal Varma, managing director and chief India economist at Nomura. That could, in turn, take a bite out of economic growth.
Investment activity in India has recovered in recent quarters, largely supported by public spending on infrastructure, Varma added.
“This will … severely impair the capex cycle,” she wrote in a recent note. Still, she added, a Congress government may need to offset existing subsidies and schemes to fund the program or consider imposing additional taxes — but there’s “limited wiggle room” as direct and indirect tax collections this year have remained largely lackluster.