India to Raise Spending and Cut Taxes
NEW DELHI — India’s finance minister introduced a budget on Monday aimed at stimulating the economy through increased government spending and tax breaks. But the plan disappointed many foreign investors, especially after the Congress Party’s re-election victory in May raised hopes that more market-friendly economic policies might be at hand.
The new budget was largely silent on foreign investment and the sale of shares in state-owned companies — areas in which investors had been anticipating significant changes.
The budget speech usually sets the tone for the Indian government’s economic policies for the coming year.
The stock market, which had rallied in recent weeks on expectations of major financial reforms, tumbled as the finance minister, Pranab Mukherjee, spoke to Parliament, and it continued falling afterward. The S.& P. CNX Nifty stock index closed down 5.8 percent. The Indian rupee depreciated 1.2 percent, trading at 48.48 against the dollar.
“Change will be gradual and incremental; don’t expect any radical, dramatic movements,” said Subir Gokarn, chief economist at Standard & Poor’s Asia-Pacific, referring to the Congress Party’s likely policies.
True to the Congress Party’s focus on the common man, Mr. Mukherjee spent most of his 90-minute speech discussing government programs for the poor, like a rural employment program guaranteeing 100 days of work a year to each indigent family. The government will increase spending by 144 percent on that project, to 391 billion rupees ($8.1 billion) this fiscal year.
Mr. Mukherjee said the government would return India’s economic growth rate to 9 percent, but he said it would do so in a “more inclusive” manner. He set a goal of cutting in half the percentage of the population that is poor within five years. The government estimates that 27.5 percent of Indians were poor in 2005, the latest year for which data is available. (India classifies people as poor if they consume less than a certain number of calories a day.)
“I am sensitive to the great challenge of rising expectations of a young India,” Mr. Mukherjee said. “It reflects a population that is restless, yet engaged and is ready to seize the opportunities that it is presented with. There are new and powerful reasons for us to create, facilitate and sustain those opportunities.”
Over all, government spending will increase 36 percent and the deficit for the 2009-10 fiscal year will reach an estimated 6.8 percent of gross domestic product, up from an estimated 6.2 percent last year. Rating firms had warned that they might reduce India’s credit rating to junk status if its deficit rose too much, but they did not make any changes Monday.
While India has withstood the global economic crisis better than the United States, Europe and export-dependent emerging markets, its economy has slowed from more than 9 percent growth in recent years to 6.7 percent in the year that ended March 31.
To resume faster growth, economists say the country will need big doses of investment from businesses and the government. The financial crisis has significantly slowed foreign investment, and the government has struggled to improve the country’s poor infrastructure because of entrenched corruption, bureaucracy and political meddling. The Planning Commission has said India needs to spend $500 billion by 2012, a target few analysts expect it to meet.
Mr. Mukherjee said the Congress Party planned to increase infrastructure spending to 9 percent of G.D.P. by 2014. India now spends about 6 percent of its G.D.P. on roads, ports, airports and similar facilities, compared with about 9 percent in China.
Several executives welcomed the focus on infrastructure and the poor but said the government had to show that it could make good on its promises. “The delivery has to happen with alacrity,” said Bharat Wakhlu, resident director for the Tata Group in New Delhi.
There was more disappointment among multinational companies, foreign investors and overseas universities who were hoping for a relaxation of investment limits in banking, retail, education and other areas.
Among those limits, foreign retailers who sell just one brand need to find a joint venture partner to sell products in India. Retail chains that sell more than one brand, like Wal-Mart Stores, are limited to setting up wholesale stores in India, which can sell to shopkeepers or restaurants but not directly to consumers. And foreign life insurance companies are restricted to owning 26 percent of Indian life insurance firms.
The new budget provided “nothing specific at all” for foreign investors, said Sanjay Nayar, chief executive of Kohlberg Kravis Roberts in India and a former head of Citibank’s Indian operation.
Rather than talk about foreign investment, Mr. Mukherjee noted how well big Indian banks had performed in the current economic crisis thanks to their nationalization 40 years ago by Indira Gandhi, the prime minister at the time.
“Her approach continues to be our inspiration,” said Mr. Mukherjee, who was finance minister for three years under Mrs. Gandhi in the 1980s. (He added that the government would sell minority stakes in nonfinancial state-owned companies, raising a modest $230 million.)
Suhel Seth, a marketing executive and trustee of the Indian Brand Equity Foundation, a public-private partnership between the government and Indian industries that aims to burnish the country’s image abroad, said the speech “tells every foreign institutional investor that India is back in the 1960s.”
The government has proposed a range of tax incentives like raising exemptions for the elderly and women; eliminating a fringe-benefits tax that companies pay on employee perks; and lowering taxes on goods and services bought by exporters, construction companies and technology firms.
Many analysts had hoped that the government would reduce various subsidies for fuel, food, fertilizers and other products. Mr. Mukherjee said the government would move to reduce and overhaul fertilizer subsidies so that the money would go directly to farmers, rather than fertilizer makers.
“This may help farmers if implemented properly,” said Kishore Tiwari, a farmer and advocate in a region where many farmers have committed suicide in recent years because of financial pressures. “There are a lot of farmer friendly announcements but it is to be seen how they are implemented.”