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India's Finance Minister Palaniappan Chidambaram (centre) poses as he leaves his office to present the 2013/14 federal budget in New Delhi Feb. 28, 2013. (B MATHUR/REUTERS)
India's Finance Minister Palaniappan Chidambaram (centre) poses as he leaves his office to present the 2013/14 federal budget in New Delhi Feb. 28, 2013. (B MATHUR/REUTERS)

India budget surprises with spending surge, wealth tax Add to ...

India unveiled new taxes on the rich and large companies on Thursday to fund higher-than-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 per cent of GDP, which some watchers said counted on ambitious revenue assumptions given hefty spending targets.

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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.

Total budget expenditure will rise by an unexpectedly high 16 per cent in the 2013/14 fiscal year that begins on April 1 to 16.65 trillion rupees ($309-billion U.S.).

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.

“The government may fall short of its tax and disinvestment targets and end up cutting spending closer to the end of the year to attain its fiscal deficit target,” said A. Prasanna, economist at ICICI Securities Primary Dealership Ltd.

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 investor-friendly reforms, including allowing entry of foreign supermarkets.

“India, at the present juncture, does not have the choice between welcoming and spurning foreign investment. If I may be frank, foreign investment is an imperative. What we can do is to encourage foreign investment that is consistent with our economic objectives,” he said.

While the added spending included capital investment that many have said is sorely needed, including a 29 per cent increase in funding for infrastructure and development, it also included a 46 per cent jump in funding for development programs in rural areas, the core voter base of the ruling Congress party.

An added surcharge on local firms with incomes of more than 100 million rupees and a 10 per cent 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.

Dozens of corporate executives, watching a telecast at an industry event in New Delhi, exchanged nervous smiles as Chidambaram introduced the surcharge on the rich.

“In the larger scheme of things, I guess that is one way of reducing his deficit. Am I going to lose sleep over it? No,” Ganesh Natarajan, CEO of IT outsourcer Zensar Technologies , said by phone from Pune, where the company is based.

Indian economic growth for the current fiscal year is on track to hit just 5 per cent, nearly half its level in 2007/08.

“This country must not lose any time – India must get its act together to accelerate the tempo of growth,” Prime Minister Manmohan Singh said in a TV interview after the budget speech.

The budget also reflects the realities of a country of 1.2 billion people, many of them poor. “On the one side is the economic policy, on the other side is economic welfare. We are a developing country. The link between policy and welfare can be expressed in a few words: Opportunities, education, skills, jobs and income,” Chidambaram said.

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