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India aims to boost growth and trim deficit in budget

The Indian finance minister, Pranab Mukherjee, plans to strengthen the country while dropping economic stimulus.

Investors watch Pranab Mukherjee, the Indian finance minister, present the federal budget on a giant screen outside the Bombay Stock Exchange in Mumbai.
Investors watch Pranab Mukherjee, the Indian finance minister, present the federal budget on a giant screen outside the Bombay Stock Exchange in Mumbai.

NEW DELHI // The Indian finance minister Pranab Mukherjee presented a budget for the new fiscal year that targets high growth while also taking aim at the country's whopping deficit. The budget for the year beginning April 1 also withdraws economic stimulus from the strongest sectors of the economy, while an overall spending increase is expected to buffer the poor and boost weak domestic consumption.

Mr Mukherjee said the end result should be an economy expanding by at least 8.2 per cent and a narrowing of the deficit to 5.5 per cent of GDP in the year starting on April 1. "The first challenge before us is to quickly revert to the high GDP growth path of nine per cent," Mr Mukherjee told parliament yesterday, but added that double-digit growth rates are possible "in the not-too-distant future". The Indian economy is expected to grow by 8.7 per cent in the current year, he added.

Analysts were generally positive on the package, but warned that it was insufficient to lift India's credit ratings, which remain the weakest among the so called BRIC nations of Brazil, Russia, India and China. The budget is "cautious and pragmatic", said Rupa Rege Nitsure, the chief economist at Bank of Baroda, but "it certainly lacks a strong policy prescription - by that I mean a road map as to how he would achieve fiscal consolidation."

This year's budget deficit stands at a 16-year high of 6.8 per cent of GDP, while central and state debt combined represents 80 per cent of GDP. Mr Mukherjee said that within six months, he will present a plan to reach a government commitment to cut public debt to 68 per cent of GDP within four years. In the meantime, he is counting on stronger revenue from a variety of sources, including sales of 10 per cent stakes in successful public sector companies and the long-delayed auction of the 3G mobile licences, due in April.

Tax revenue is also expected to rise thanks to a withdrawal of stimulus on stronger sectors and a rise in domestic consumption. Income tax rates have been cut for up to 60 per cent of the population and more money is being directed to the jobs scheme and infrastructure programmes that create jobs for the poor. However, stronger sectors such as car manufacturing face higher taxes. Excise duties on all non-oil products are being rolled back by two percentage points to the 10 per cent, where it was before the global economic crisis. Mr Mukerjee's announcement on a tax on tobacco and an end to tax cuts on fuel products and commercial vehicles prompted an uproar in the Lok Sabha, or lower house of parliament.

Analysts warned that the total package will worsen India's inflation problem and force up interest rates. Food prices were up an annual rate of 18.5 per cent in the first week of this month and are spreading quickly through the overall economy along with higher wages. "Product prices will move higher, so that's inflationary. Fuel prices might rise, so that's inflationary. And with this domestic consumption, that's inflationary, too," said Andrew Holland, the chief executive at Ambit Capital. "What this means is that interest rates will move higher more quickly."