CALCUTTA, India, July 9 (UPI) -- Sticking to the promises that India's Congress Party-led United Progressive Alliance government made after the recent elections, Finance Minister P. Chidambaram walked the political tightrope while announcing a budget on Thursday that unveiled billions of dollars of spending for the poor and claimed it is "pro-business and growth oriented" as well.
Announcing extra spending of $2.2 billion Chidambaram imposed a 2 percent income tax surcharge to raise up to $1.1 billion for extra education spending and a revival of a rural infrastructure fund with $1.9 billion.
"Boosting agriculture growth through diversification and development of agro-processing is one of the objectives of the (Common Minimum Program) CMP", Chidambaram said, adding, "The key to growth is investment; public and private, domestic and foreign. It is my goal to make the environment in India attractive to investors."
Chidambaram's "cautious" budget contained, according to experts "no radical measures" and was less inflationary than many analysts had feared would come out of Left pressures. But as expected, it contained a bonanza for the farm sector that included cheaper credit, enhanced farm and cattle insurance, and tax concessions for allied activities like horticulture and dairying.
Of the 12 thrust areas Chidambaram listed out in the budget, four related to farm. These included doubling farm credit, accelerating the completion of irrigation projects and investing in rural infrastructure. Further, he promised improving the farm products markets and promoting agri-business and providing farm insurance and livestock insurance.
Chidambaram also said that expanding water harvesting, watershed development and minor-irrigation and micro-irrigation schemes will be amongst the thrust areas.
The finance minister vowed to cut fiscal deficit by forecasting that the deficit would be brought down to 4.4 percent of gross domestic product by the year-end in March 2005 from 4.6 percent in 2003/04, but announced no major measures for tackling the issue.
Moreover while issues of stability and equity have been addressed in "moderate measure", the issue of growth has been more specific to certain sectors of the economy like the farming sector.
"The budget appeared precariously one-sided in its approach, leaving corporate India in the lurch at times, while giving solid support to other facets of the same sector," said an analyst. In pharmaceuticals, for instance, there has been no mention of any relief in taxation, or any additional benefits. However, there was a 10-year 100 percent tax exemption for companies involved in biotechnology research.
But foreign investors in certain key and lucrative sectors were given a good deal. Foreign direct investment limit in insurance, for instance, has been raised to 49 percent from the existing 26 percent, while the telecom industry is in for a 25 percent rise in allowed FDI cap to 74 percent. Aviation will see the cap rising from 40 percent to 49 percent.
Small wonder then, that many in industry are unhappy.
Satish Reddy, COO of Dr. Reddy's Laboratories, said that "although the budget takes forward the promises made in the Common Minimum Program, by focusing on social issues of Education, Health and Employment and economy sectors like Agriculture,, and select sectors like Telecom, Insurance etc. have been given impetus, there is nothing in store for the other sections of the industry."
But spooked most by this budget were the stock markets. Despite the fact that Chidambaram announced significant measures to broaden the capital markets -- like facilitating simpler registration and operations procedures for FIIs, and, raising their investment ceiling in debt funds from $1 billion to $1.75 billion and removing long-term capital gains tax and reduced the short-term capital gains tax from 30 percent (at the maximum tax slab) to a flat 10 percent -- the stock markets gave it a thumbs down yesterday, as brokers and speculators expressed their extreme disappointment over the imposition of a 0.15 percent tax on all market transactions.
The benchmark index, Sensex, after smartly rising by about 84 points during the budget proceedings in the parliament, plunged right after the transaction tax announcement and closed down 2.3 percent at 4,843.85.
The markets however recovered yesterday's losses today following Securities Exchange Board India chief's assurance that turnover tax would be implemented only after the finance bill is passed in the parliament, and on the realization that, at 15 percent, its impact is miniscule for FIIs compared to the erstwhile long-term capital gains tax rate of 20 percent that turnover tax replaced. Nevertheless, speculators and day traders took to the streets toady protesting against this tax.
Still, leading economists termed the budget as "balanced", and added that it would push forward reforms process including fiscal consolidation while seeking higher employment generation.
"It is a responsible but a cautious budget. It indicates government's commitment to fiscal consolidation and keeping the reform program going," said Suman Berry, Director General of National Council for Applied Economic Research.
"The budget, broadly speaking, is positive," said Adrian Lim of Aberdeen Asset Management. "And although the devil may be in the details and the implementation, it assures us that India remains committed to economic reforms and market liberalization."
Nevertheless, according to Prime Minister Manmohan Singh, the "original reformist" who forced the country to plunge on the economic reforms and globalization path in his earlier avatar as the finance minister on 1991, this budget "finds a solution to the ills plaguing various sectors" and endeavors to "combine the rapid economic growth with enhanced social equity."
"India is a vast country with great diversity and complexity where no single application will work," he said. "There is a need for experimentation of viable options which must vary from state to state and region to region."
