NEW DELHI, 9 July 2004 — India’s new United Progressive Alliance government unveiled billions of dollars in spending for the poor, from water to jobs, yesterday in its first budget that taxes the rich but does little to tackle a nagging deficit.
Finance Minister Palaniappan Chidambaram’s cautious budget was less inflationary than some analysts had feared but, as expected, included no major measures to cut a worrying fiscal deficit seen as a challenge to sustained high economic growth. Instead, it relied largely on growth — targeted at 7 to 8 percent for the year to March, 2005 — to bring the deficit down to 4.4 percent of gross domestic product (GDP) from 4.6 percent.
Military spending has been increased by almost 17 percent to speed up the modernization of the armed forces. The finance minister said the rise to 770 billion rupees ($16.73 billion) from 653 billion rupees the year before had become “necessary” because of low hikes in defense spending in previous years and a massive military acquisition program.
“The government is determined to eliminate all delays in the modernization of the defense forces (and) having regard to the trend of defense capital expenditure in recent years, it has become necessary to make a higher allocation this year,” Chidambaram told Parliament.
Share markets gave the budget a thumbs down, with traders particularly upset over a move to impose a 0.15 percent tax on purchases of securities on stock exchanges and the benchmark Bombay index closed down 2.3 percent at 4,843.84. Some investors and traders staged a small protest in Bombay.
Announcing a raft of programs for education, health, rural reforms and housing, Chidambaram also said boosting investment was vital to achieve his growth target and to fight poverty.
“The key to growth is investment,” he told parliament. “Public and private. Domestic and foreign. It is my goal to make the environment in India attractive to investors.”
But the 2004/05 budget contains few major concrete measures to boost investment. It imposes a 2 percent levy on all taxes, an additional 10 percent surcharge on people earning more than $19,230 a year and raises corporate tax by an extra 2.5 percent.
The budget lifts spending in 2004/05 by 100 billion rupees ($2.2 billion) over the previous government’s interim budget in February. The increase is largely to deliver the Congress-led coalition’s promised “new deal” for rural India, which brought it to power. Congress failed to win an overall majority in Parliament in the May general election, and relies on the Communists for support.
“It appears to be a very carefully balanced act,” political analyst Mahesh Rangarajan said. “He is targeting the poor in line with the government’s ... program, while committing himself to fiscal prudence. The question is where will the money come from for these measures?” But there were no major surprises or shocks. Many of the measures were largely expected, including a rise in tax on services — which account for 50 percent of GDP — to 10 percent from 8 percent, the abolition of some excises, including those on tractors and computers, and a revival of a rural infrastructure fund with $1.7 billion.
Chidambaram did not, as analysts had feared, impose a service tax on road transport, which would have stoked inflation in the vast nation. But he increased excises on steel.
In addition to the new taxes, some spending will be reallocated to pay for the new measures, but details were vague. “It seems to be a very populist budget with the main focus on rural India,” said Arun Kumar Rajappan, of ING Financial Markets in Singapore. “The moves to boost the infrastructure sector are bullish for the equity markets.”
The budget raised foreign investment caps in the insurance, telecommunications and aviation sectors, and pledged increased investment in state power, energy and telecoms firms. It also reduced tariffs, increased farm sector credit and proposed a new container port terminal in the south.
But the government did not tackle the thorny issue of reforming byzantine labor laws, something the ousted government had pledged to help business.
While many have hailed the budget, apprehensions were voiced on how effectively it would be implemented.
Prime Minister Manmohan Singh described the budget as “growth-oriented.” Justifying the importance accorded to agriculture and rural India, the premier said that the budget proposed “high dosage of investment in agriculture, industry and social and physical infrastructure.”
The budget envisages more housing for poor, food security system and redesigning of health insurance scheme for the poor. It also aims at doubling farm credit in three years and accelerating work on irrigation projects.
The finance minister said: “A task force will be set up to examine the cooperative banking system in the agriculture sector.”
