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Indian budget focuses on farms, gears up for vote

Finance Minister Palaniappan Chidambaram, presenting the fifth and last full budget of the left-leaning administration, proposed $15 billion to write off debt owed by small farmers to banks in a move analysts said was aimed at the ballot box.

He pledged higher spending on health and education to spread the benefits of an economic boom beyond the cities to rural voters and proposed raising the income tax threshold. Duties on small cars and two-wheelers will be cut to boost manufacturing.

He left corporate tax rates unchanged but said he was raising a tax on short-term capital gains, aimed at share transactions, to 15 percent from 10 percent, helping send the stock market down 1.4 percent on the day.

“The emphasis on social sectors like health, education and the rural economy do suggest that the budget is leaning towards some populist measures,” Yes Bank chief economist Shubhada Rao said, although she noted excise cuts would help damp inflation.

The rupee slipped against the dollar after the budget but the benchmark bond yield eased 5 basis points on the day to 7.55 percent after the finance minister said he expected to better his fiscal targets for the current financial year.

Chidambaram said the government’s aim was to boost employment and abolish poverty and inequality in the country of 1.1 billion people, where some 260 million struggle on less than $1 a day.

Television channels showed farmers celebrating the loan write-off, but the government’s communist allies said many were indebted to private money lenders and would not benefit.

Spending

Total spending was budgeted at 7.51 trillion rupees ($188.5 billion) for the fiscal year starting April 1, up 6 percent, including a 10 percent increase in defence spending. Revenue is forecast to rise almost 15 percent.

Among the help for farmers, Chidambaram proposed extending crop insurance schemes and boosting tea, cashew, coconut and pepper sectors, while 200 billion rupees was set aside for irrigation. Spending on a rural job guarantee scheme is to rise 60 billion rupees to 160 billion rupees.

Gross market borrowing for 2008/09 was put at 1.45 trillion rupees, lower than a market forecast of 1.65 trillion.

Chidambaram said the federal fiscal deficit would fall to 3.1 percent of gross domestic product in 2007/08, beating a target of 3.3 percent. The deficit target for 2008/09 would be 2.5 percent, below a 3 percent target enshrined in law, but he said that left headroom in case more borrowing was needed.

He did not specify provisions for higher government workers’ salaries. A pay commission will submit a wage review soon.

“The reduction of the fiscal deficit in ’08/09 to 2.5 percent is positive, however it may not include the impact of the pay commission, so it could be higher than forecast,” said Shuchita Mehta, chief India economist at Standard Chartered Bank.

The government said it would need another year to meet a legal goal of eliminating the revenue deficit, the gap between tax revenues and current spending, due in the coming fiscal year.

Growth and inflation

While he was confident India would grow by 8.8 percent in the fiscal year ending on March 31, Chidambaram said turbulent financial markets and high commodity prices posed risks.

The communist-backed government is concerned that inflation hits the poor first, and Chidambaram said containing price pressures was a cornerstone of its policies.

“Management of the supply side of food articles will be the most crucial task in the ensuing year,” he said, adding the country was determined to be self-sufficient in food grains.

Data on Friday showed annual wholesale price inflation in mid-February jumped to an eight-month high of 4.89 percent.

Deputy central bank governor Rakesh Mohan said the government’s emphasis on inflation control was “music to my ears”.

High interest rates last year have slowed consumption, and data showed annual growth in the $1 trillion economy eased to 8.4 percent in the December quarter from 8.9 percent in September.

India, the world’s fastest growing major economy after China, clocked 9.6 percent in 2006/07, its fastest pace in 18 years.

Chidambaram pledged reforms in coal and power, and said financial sector reforms would continue, including developing a market for exchange-traded currency and interest rate futures.

High capital inflows last year complicated monetary policy by pushing the rupee up against the dollar, and Chidambaram said in the long term the economy must be able to absorb more capital.

“In the short term it is our responsibility to manage the flows more actively,” he said.