Buoyed by growth, India to cut deficit

Indirect taxes to contribute much of revenue increase in Budget 2010
By MALMINDERJIT SINGH


INDIA’S economy has weathered the global recession well and may grow at a 10 per cent pace in the “not-too-distant future”, but the country also needs to review public spending and improve its fiscal position.
This message was delivered by Indian Finance Minister Pranab Mukherjee during his Budget speech in Parliament yesterday. India’s Budget 2010 places greater emphasis on achieving higher growth instead of curbing inflation, and works towards fiscal consolidation.
In his statement, Mr Mukherjee said that India is on track to grow 7.2 per cent in the fiscal year ending next month. He expects Asia’s third-largest economy to grow 8.5 per cent next fiscal year, before hitting 9 per cent growth in 2011-12.
“The economy is in a better position than a year ago. We have to quickly revert to a higher GDP growth path of 9 per cent and cross double-digit growth,” he said.
The fiscal deficit (a reflection of government borrowings) is estimated to touch 6.8 per cent in 2009-10, but Mr Mukherjee expects it to shrink to 5.5 per cent of GDP for the coming fiscal year, before falling to 4.1 per cent of GDP by 2013. However, Indian bond yields reached a one-week high of 7.89 per cent yesterday as the finance minister announced that the government plans to increase market borrowing by 1.3 per cent in his US$239 billion Budget.
Nevertheless, analysts lauded the government’s efforts to achieve fiscal consolidation. PK Basu, managing director and chief economist at Daiwa Capital Markets Singapore, told BT Weekend that the Budget included credible steps to boost revenue and said that this may lead to an even lower fiscal deficit than projected.
Much of the revenue increase comes from a greater focus on indirect taxes, including plans to raise across-the-board excise duty in non-oil goods from 8 to 10 per cent and hike the Minimum Alternative Tax (MAT) on corporate profit from 15 per cent to 18 per cent.
Besides this, the Budget also restored the 5 per cent duty on crude oil and 7.5 per cent duty on gasoline and diesel, which sparked off a noisy walkout by opposition party members from the proceedings in Parliament. Fearing a political backlash, a decision on the Kirit Parikh committee recommendations – which include price deregulation of petrol and diesel, and a steep decrease in the subsidy of cooking gas and kerosene – was postponed to a later date.
Politically correct
According to Amitendu Palit, visiting research fellow at the Institute of South Asian Studies in Singapore, this was a “politically correct” decision, as was the announcement to restructure personal income tax by increasing the upper limit, of those who pay only 10 and 20 per cent income tax, to stimulate greater spending.
“By widening the tax slabs, the government has increased the disposable income of the middle class and therefore created a feel-good factor,” explained Dr Palit.
Mr Mukherjee also announced that the government would sell its stake in 60 state firms and would expect to raise US$8.6 billion by doing so.
The Budget also included plans to offer more licences for opening new banks, and this news propelled the shares of Indian banks as the Sensex rose more than 350 points. The State Bank of India climbed 3.2 per cent while rivals ICICI Bank and HDFC Bank rose 2.4 per cent and one per cent respectively.
While many expected the Budget to introduce measures to arrest the concerns of rising inflation, Dr Palit told BT that the Budget’s direct intervention scope was limited as much of the inflation is due to supply-side problems. “The measures to strengthen food supply and management have been planned effectively to curb rising food prices, but this needs to be maintained over a period of time,” he cautioned.
Dr Palit said the Budget could have taken a harder line on some aspects. “The measures on disciplining expenditure have not been implemented to the extent expected, and in terms of taxation the government should have introduced the Goods and Services Tax this time. However, there were measures to boost foreign investment, such as a simplified method of calculating the foreign equity component of companies, and the proposal to establish a Coal Regulatory Authority, which should encourage more entrepreneurs in the coal sector,” he pointed out.
Mr Mukherjee announced the govt would sell its stake in 60 state firms and expects to raise US$8.6b by doing so.