28 Feb 2006 14:31:37 GMT, Source: Reuters, by Anirban Nag and Unni Krishnan
NEW DELHI, Feb 28 (Reuters) – India pledged on Tuesday to boost spending on health, education and rural infrastructure to help the poor, unveiling an annual budget designed to foster growth and rein in the country’s federal deficit.
Finance Minister Palaniappan Chidambaram said the government was determined to boost the rate of economic expansion to 10 percent in coming years from an estimated 8.1 percent this fiscal year.
"The assault on poverty and unemployment continues. I believe that growth is the best antidote to poverty," he told parliament.
The communist-backed coalition government came to power in 2004, vowing to raise living standards in a country where a quarter of the 1 billion-plus population lives in poverty.
Chidambaram set a federal fiscal deficit target of 3.8 percent of gross domestic product for the next fiscal year which, if achieved, will be the lowest since economic reforms began in 1991. He said the 2005/06 deficit would come in lower than expected at 4.1 percent.
The finance minister said the government had focused on fiscal prudence in the financial year ending March 31.
"However our success should not tempt us to stray from this path and we shall not do so."
Markets were largely pleased. The main stock index hit a record early on and ended 0.9 percent higher. The rupee edged higher, but the yield on the benchmark 10-year government bond rose on plans for slightly more net borrowing.
Analysts welcomed measures to improve infrastructure and promote consumption. Progress in both is seen as key to growth.
But credit rating agency Standard & Poor’s, which puts India one notch below investment grade, said it should use this period of strong growth to consolidate its finances more aggressively.
"The question is not whether the government can consolidate," Ping Chew, S&P director of sovereign ratings, told Reuters. "The question is shouldn’t the government consolidate faster?"
WHERE IT’S GOING…
Total spending for 2006/07 was pegged at 5.6 trillion rupees ($127 billion), with social spending increasing about 20 percent.
Chidambaram raised spending on a rural jobs guarantee scheme to 143 billion rupees from 117 billion in 2005/06 and provided better terms for loans to farmers. Education will get 31.5 percent more money and health spending 22 percent more.
Rural infrastructure projects worth 187 billion rupees are also planned next year. Analysts say India’s bad roads, congested ports and power shortages are a big obstacle to achieving the double-digit growth needed to spread wealth among the poor.
Chidambaram said 100 billion rupees were allocated to a rural infrastructure development fund and 99.45 billion rupees for highways development. Funds for shipping would also increase and the government planned to increase power capacity by March 2007.
A cap in foreign investment in India’s sovereign debt market was raised to $2 billion from $1.75 billion and the corporate debt limit was trebled to $1.5 billion, lifting the rupee in anticipation of more foreign money inflows.
The government, facing state elections this year, has largely relied on strong economic growth to fund spending promises. Data on Tuesday showed GDP grew an annual 7.6 percent in the quarter to December, slowing from 8.0-percent in July-September.
SHOW ME THE MONEY
The Congress party-led government put revenue generation, rather than spending cuts, at the centre of its budget policy. Its strategy is to widen the tax net to fill federal coffers.
Chidambaram said the tax-to-GDP ratio would rise to 11.2 percent from 10.5 percent in 2005/06. He forecast tax revenues at 4 trillion rupees ($90 billion), with gross government borrowing set at 1.53 trillion rupees, 10 percent higher than 2005/06.
One key budget measure was in services, making up more than half of the GDP. Chidambaram raised a services tax to 12 percent from 10 percent, but left personal and corporate taxes alone.
He also raised duties on cigarettes and computers, put up a tax on securities and transactions by 25 percent and proposed a nationwide goods and services sales tax to start in 2010.
A levy on crude rose to 2,500 rupees per tonne from 1,800 rupees but the peak customs duty was cut to 12.5 percent from 15 percent, bringing it more in line with Southeast Asian nations.
Another revenue source is expected to come from privatisation. Selling stakes in state-run firms has proved politically problematic so far but Chidambaram said he expected to raise 38.4 billion rupees from stake sales in 2006/07.