India unveils budget for recovery after crackdown on 'black money'

India on Wednesday unveiled a budget that includes hikes in government spending and cuts in taxes to help the poor as Prime Minister Narendra Modi seeks to win back the sympathy of voters hit hard by his recent crackdown on "black money."

Finance Minister Arun Jaitley announced increases in spending on rural areas, infrastructure and fighting poverty. He sought to assure lawmakers and the country that the economic impact of the government's cash crackdown would wear off soon.

Jaitley also halved the basic personal income tax rate, and cut taxes on small firms that account for 96 percent of India's businesses.

"It's an election budget, to all intents and purposes, with a massive push on rural spending and some quite big tax cuts," said Shilan Shah, Indian economist at Capital Economics in Singapore.

The budget comes days before India holds five regional elections that will go some way in determining whether Modi can win a second term in 2019.

Modi's shock decision in November to scrap high-value banknotes worth 86 percent of India's cash in circulation has hit consumers, disrupted supply chains and hurt investment.

The worst of the cash crunch is now over, however, and Jaitley said he expected it would not spill over into the next fiscal year. Still, the finance ministry forecasts growth could dip as low as 6.5 percent this fiscal year before picking up to between 6.75 and 7.5 percent in 2017-18.

That is below the target rate of 8 percent or more that Modi needs to create enough jobs for the 1 million young Indians who enter the workforce each month.

On the tax side, Jaitley's standout announcements were the halving of the lowest rate of personal tax to 5 percent that applies on incomes between 250,000 and 500,000 rupees ($3,700-$7,400). Better-off taxpayers will pay a 10 percent surcharge.

Small businesses with turnover up to 500 million rupees a year will see their tax rate cut to 25 percent from 30 percent. Taken together, the cuts in direct taxes would cost the public purse close to $3 billion.

Jaitley's fiscal largesse will not only boost consumer spending but may also shore up the fortunes of Modi's nationalist party in the regional elections for which voting begins on Saturday.

Punjab and Goa go to the polls first, to be followed by the big battleground state of Uttar Pradesh, and finally the small northern states of Uttarakhand and Manipur. Results of all five elections are due on March 11.