Something for all in India's
ballot-box budget By Indrajit
Basu
KOLKATA - No one doubted that what will
probably be Finance Minister Palaniappan
Chidambaram’s last budget before India’s ruling
United Progressive Alliance government goes to the
polls would be a populist one. Even so, a
more-than-expected dose of populism was mixed with
some sensible measures that addressed social
concerns, and according to the minister, "will
stimulate economic growth as well".
The
ruling coalition, run by the Congress party and
supported by the Left, faces nine state polls this
year besides general elections by May 2009.
An unprecedented level of social welfare,
tax and manufacturing-directed measures wooed the
poor, the middle class and industry. A debt waiver
was granted to farmers, the tax free level of
income
was
raised and local duties were cut across a wide
section of manufactured goods, including small
cars, while government spending targeting women,
children and minorities was increased. The
stock market was unimpressed, declining to accept
Chidambaram's claim that "this budget will
stimulate investment and [economic] growth, which
at 8.8% is not a joke, and will create wealth."
The benchmark Bombay Stock Exchange
Sensitive Index (or Sensex) plunged by more than
500 points as Chidambaram announced a 5% increase
(from 10%) in short-term capital gains tax on the
sale of shares held for less than 12 months. A
246-point recovery before the close was a brief
interlude before the Sensex slid by over 542
points on opening trade on Monday, a fall also
reflecting global economic concerns as the US
economic outlook worsened.
Of particular
concern to India's investors was the budget waiver
of US$15 billion worth of loans to farmers, a huge
bank of voters.
The fiscal deficit, or
increase of government’s expenditure over income -
a problem plaguing the investment community for
decades - "may actually increase due to spending
increases in the budget, wage pressures, [and]
uncertainty on who will be funding the debt waiver
to farmers," said Tushar Poddar, vice-president,
Asia Economic Research of Goldman Sachs, while
waiting to see the fine print on the budget
numbers.
Standard & Poor's said that
while the budget assumes a fiscal deficit of 2.5%
of gross domestic product (GDP) for the year
ending March 31, 2009, compared with the 3.1%
deficit in fiscal 2007-08, the actual deficit
could bloat to 6.7% of GDP in the coming 12
months.
Even so, many of the lower paid
will not be complaining. The $15 billion loan
waiver and increase of the income tax exemption
limit from $2,500 to $ 3,750 a year will mean that
over 40 million farmers will not have to repay
their loans and more than 20 million Indians will
save up to $1,100 in income tax per year.
Their backing could be crucial for the
Congress party which is kept in power by the 61
seats in the 543-seat Parliament held by the
communist CPI-M-led Left Front.
The burden
of farmer's loans has been a major and sensitive
issue in India, increasingly brought to public
notice with the suicides of 4,000 farmers since
2004 after failing to pay off their debt. CPI-M in
particular had been planning its next election
manifesto around this issue. Clearly the Congress
has taken the wind out of their sales announcing
the loan waiver.
Left out this time that
after a decade of hand-holding through tax breaks
and export incentives is the country’s $64
billion-revenue information technology industry.
Companies such as Tata Consultancy Services and
Infosys Technologies were looking for measures
that would help them grapple with increasing
costs, the specter of a global slowdown in IT
spending, and a depreciating dollar. The Indian
currency appreciated 12.8% against the US dollar
last year, undermining earnings in the sector,
which gets more than 60% of revenues from the US.
It looks as if "the Finance Minister
forgot we exist", said Raman Roy, widely regarded
as the pioneer of the IT-enabled services business
in India, who also played a pivotal role in making
India a hub for remote processing.
The
opposite may be the case. Chidambaram imposed a
higher import duty of 12% packaged software and
brought customized software under the service tax
net. The government did pledge to improve
broadband access at 6,000 model schools, and make
provisions for setting up 16 central universities
and three technology institutes, in a move to
improve the supply of skilled workers and thus
"from a long-term view, focuses on the supply-side
challenges restraining India’s competitive edge",
said Vineet Nayar, chief executive of HCL
Technologies, an Indian IT company.
For
the corporate sector, the absence of any news was
good news - the budget kept corporate taxes and
most other levies largely untouched. According to
the Confederation of Indian Industry (CII), the
country’s leading industry association, the
reduction of manufacturing duties and income taxes
"are steps in the right direction" that will
indirectly benefit industry by spurring
consumption.
The budget had virtually
nothing for foreign and non-resident Indian
investors, other than removing capital gains tax
on conversion from foreign currency exchangeable
bonds (called FCEB) to equity shares by Indian
companies.
The absence of significant
reforms and the scale of largesse in the garb of
social welfare, meant the budget will "have a
multiplier effect and stimulate the economy,"
according to Chidambaram.
About 76% of
chief executives polled by CII believed the budget
focused on inclusive and sustainable growth,
although 58 % said it lacked in reform
orientation. A similar survey by
PricewaterhouseCoopers found 55% of respondents
believed the budget did not take any "meaningful
steps to promote growth", while 95% said it did
not address the issue of promoting infrastructure,
on which depends future economic growth.
Given the political context of the
forthcoming elections] the budget basically
addressed domestic consumption while keeping
intact the governments’ reformist agenda intact,
said Frank Hancock, managing director, ABN AMRO
Asia Corporate Finance.
"Overall, it will be viewed
as neutral to positive by investors," he said.
"The fact that there were no easy sops on
corporate and personal income tax rates should not
be a problem for anyone as these are already
broadly in line with South East Asia. Consumers
will continue to spend, and corporate India has
benefited, at least some sections [like banks,
automobile, and consumer goods companies]. I think
that the government has got that balance broadly
right."
Indrajit
Basu is a Kolkata-based
journalist.
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