India budget surprises with spending surge, wealth tax
Economy slows further, posts growth of 4.5 pct
NEW DELHI, Feb 28, (Agencies): India unveiled new taxes on the rich and large companies on Thursday to fund higherthan-expected spending for the next fiscal year, in a budget that aimed to revive growth amid the country’s worst slowdown in a decade ahead of a 2014 election.
Stocks, bond prices and the rupee all fell despite Finance Minister P. Chidambaram’s vow to cut next year’s fiscal deficit to 4.8 percent of GDP, which some watchers said counted on ambitious revenue assumptions given hefty spending targets.
There had been widespread expectation, fuelled in part by comments by finance ministry officials, that Chidambaram would present an austere budget in line with the spending cuts he forced on government ministries in recent months.
But the spending plan appeared to have been drawn up with a looming general election in mind, some economists said. “With a general election not much than a year away, political pressure from within the Congress Party may well have had an influence on the make-up of the Finance Minister’s budget,” Credit Suisse said.
Chidambaram, a three-time finance minister seen as a candidate for prime minister in 2014, has staked his reputation on cutting swollen fiscal and current account deficits that have alarmed credit rating agencies and triggered warnings that India’s sovereign bonds could be downgraded to ‘junk’ status. There was no immediate comment from the agencies.
“Fiscal consolidation cannot be effective only by cutting expenditure,” Chidambaram said in his speech, seen as a balancing act to stave off a credit rating downgrade while meeting demands for populist spending heading into an election year.
Expenditure
Total budget expenditure will rise by an unexpectedly high 16 percent in the 2013/14 fiscal year that begins on April 1 to 16.65 trillion rupees ($309 billion).
Next year’s fiscal deficit target is in line with expectations but assumes hefty revenue growth, including 558 billion rupees from the sale of government stakes in companies, or more than double the 240 billion rupee target for the current year, which falls short of the initial target.
“From a macro perspective, the budget is disappointing in our opinion as it lacks any expenditure control,” Nomura analysts wrote. The budget also assumes revenue of 408.5 billion rupees from telecoms sector fees, more than double what it will generate this year, with its next auction of mobile airwaves poised to flop after attracting just one bidder.
Net market borrowing of 4.84 trillion rupees for the new fiscal year met investor hopes that the figure would not top 5 trillion rupees, but the gross figure exceeded expectations.
The budget included several measures to spur investment both in markets and by corporations, including an incentive on investments in plant and machinery exceeding 1 billion rupees and extending tax breaks for small companies that grow larger, and an expansion of tax-free bonds for infrastructure. Chidambaram has focused on winning back foreign investors unnerved by proposals of his predecessor, Pranab Mukherjee, to tax merger deals retrospectively and clamp down on tax evasion. Since September, he has implemented a spate of investorfriendly reforms, including allowing entry of foreign supermarkets.
An added surcharge on local firms with incomes of more than 100 million rupees and a 10 percent surcharge on individuals with taxable incomes topping 10 million rupees - a level of earnings currently declared by just 42,800 people - will be put in place for one year.
India’s economic slowdown deepened in the October-December quarter, expanding by 4.5 percent on an annual basis, official data showed on Thursday.
The Indian economy, the world’s 10th biggest, is projected to expand by 5.0 percent this fiscal year to March, the lowest figure for a decade, after growth of 6.2 percent last financial year.
Over the course of this fiscal year, growth has dropped progressively from 5.5 percent growth in the April-to-June quarter and 5.3 percent in the JulySeptember quarter.