India's new government unveiled billions of dollars in spending for the poor, from water to jobs, on Thursday in an expansionary first budget that taxes the rich but does little to tackle a nagging deficit.
Finance Minister Palaniappan Chidambaram's cautious budget was less inflationary than some analysts had feared but, as expected, included no major measures to cut a worrying fiscal deficit seen as a challenge to sustained high economic growth.
Instead, it relied largely on growth - targeted at 7 to 8 percent for the year to March, 2005 - to bring the deficit down to 4.4 percent of gross domestic product (GDP) from 4.6 percent.
International ratings agencies cautiously welcomed the budget measures, but said more had to be done on the deficit.
Chidambaram announced a range of programmes aimed at the poor for education, health, rural reforms and housing and water.
"These are real people. They are flesh and blood. We need to give them some hope," he said, explaining his "caring budget".
"If agriculture grows, everything will grow." He told parliament boosting investment was vital to achieve his growth target and to fight poverty: "It is my goal to make the environment in India attractive to investors."
But the 2004/05 budget contains few major concrete measures to boost investment. It imposes a 2 percent levy on all taxes, an additional 10 percent surcharge on people earning more than $19,230 a year and raises corporate tax by an extra 2.5 percent.
Spending was lifted 100 billion rupees ($2.2 billion) over the previous government's interim budget in February.
The increase is largely to deliver the Congress-led coalition's promised "new deal" for rural India, which brought it to power. Congress failed to win an overall majority in parliament in the May general election, and relies on the Communists for support."It appears to be a very carefully balanced act," political analyst Mahesh Rangarajan said. "He is targeting the poor in line with the government's ... programme, while committing himself to fiscal prudence. The question is where will the money come from for these measures?"
Many of the measures were largely expected, including a rise in tax on services - which account for 50 percent of GDP - to 10 percent from 8 percent, the abolition of some excises, including those on tractors and computers, and a revival of a rural infrastructure fund with $1.7 billion.
Chidambaram did not, as analysts had feared, impose a service tax on road transport, which would have stoked inflation in the vast nation. But he increased excises on steel.
In addition to the new taxes, some spending will be reallocated to pay for the new measures, but details were vague.
"It seems to be a very populist budget with the main focus on rural India," said Arun Kumar Rajappan, of ING Financial Markets in Singapore. "The moves to boost the infrastructure sector are bullish for the equity markets."
The budget raised foreign investment caps in the insurance, telecommunications and aviation sectors, and pledged increased investment in state power, energy and telecoms firms. It also reduced tariffs and increased farm sector credit.
MAIN POINTS:
-- Sustained GDP growth of 7-8 percent
-- Focus on infrastructure and rural sectors
-- Interest rates to remain benign
-- Fiscal deficit at 4.4 percent of GDP
-- Defence spending for 2004/05 raised to 770 billion rupees from 660 billion earlier estimate
-- Medium-term inflation to be in the range of 4-5 percent
-- Inflation in 2004/05 to be in the range of 5-6 percent
-- Asset sale target in 2004/05 lowered to 40 billion rupees ($873 million) from 160 billion rupees
-- Hike in foreign direct investment (FDI) limit on insurance to 49 percent from 26 percent
-- FDI cap in telecom raised to 74 percent from 49 percent
-- FDI cap in aviation raised to 49 percent from 40 percent
-- Revenue deficit at 2.5 percent of GDP
-- Nominal GDP growth for 2004/05 assumed at 12-13 percent
GROWTH MEASURES:
-- Government to widen service tax net
-- To provide additional 100 billion rupees for expenditure
-- Total expenditure for 2004/05 at 4.78 trillion rupees.
-- Net government borrowings at 1.5 trillion rupees, including 600 billion rupees market stabilisation securities
-- Emphasis on investments in airports, sea ports and tourism
-- Registration for foreign institutional investors to be made simpler
-- FII cap in debt market raised to $1.75 billion from $1 billion
-- Corporate investors in debt mutual funds will be levied a 20 percent dividend distribution tax
-- Government to hike investments in state-run power, telecom and petroleum firms
-- Securitisation law to be amended to hasten loan recovery by banks
TAX MEASURES:
-- Long-term capital gains tax abolished
-- Imposition of transaction tax at 0.15 percent on securities trade.
-- Transaction tax to include bonds, shares and derivatives.
-- Short-term capital gains tax reduced to 10 percent
-- Peak customs duty maintained at 20 percent for this fiscal year
-- Surcharge of 2 percent on taxes aggregating 40-50 billion rupees to fund education
-- Service tax hiked to 10 percent from 8 percent
-- Surcharge of 2.5 percent on corporate tax, to be followed by education cess of two percent
-- Service tax levied on transport booking, airport services firms but no service tax on road transport firms
-- Excise duty on tractors cut to zero from 16 percent
-- Customs duty on non-alloy steel reduced to 10 percent
-- Customs on lead, zinc, copper, ferro alloys cut to 15 percent from 20 percent
-- Dividend distribution tax proposed at 20 percent for corporates in debt funds
-- Minimum income tax slab raised to 100,000 rupees
OTHER MEASURES:
-- No change in small savings interest rate
-- Interest on loans to states reduced to 9 percent from 10.5 percent
-- Debt swap scheme to be extended to states for repaying National Bank for Agriculture and Rural Development loans
-- Banks, financial institutions to provide 400 billion rupees for infrastructure
-- Setting up of an investment commission to attract foreign and domestic investors to India
-- Panel to be formed to restructure state firms.