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Markets cheer India's
budget
NEW DELHI - India's
Finance Minister P Chidambaram Monday unveiled his
budget - the government's annual exercise of
presenting the books and stating the economic
policies to be followed in the coming year - that
aimed at combating poverty, significantly changed
the tax structure and showed signs that foreign
direct investment (FDI) in more sectors might soon
be liberalized.
The finance minister said
he expected the US$600 billion economy to expand
by 6.9% in 2004-05 and pegged industrial growth at
8.9%, with inflation at about 5%. Responding to
the need to alleviate the misery of the 260
million Indians living below the poverty line, the
minister suspended attempts to reduce the
government's fiscal deficit, which he said would
hit 4.5% of gross domestic product (GDP) in this
fiscal year. A fiscal discipline law passed last
year stipulated that the deficit must fall by 0.3
of a percentage point of GDP each year, but
Chidambaram announced that the 2005-06 target was
4.3%.
"I was left with no option but to
press the pause button vis-a-vis the [fiscal
responsibility] act," he said. "I may add that we
are perilously close to the limits of fiscal
prudence and there is no more room for spending
beyond our means." The Congress Party-led United
Progressive Alliance (UPA) government was swept
into power last year amid a growing perception
that the previous government was neglecting the
most vulnerable sections of the population. So the
Congress victory was seen as a mandate for
addressing the needs of the poorest of the poor.
Thus the Harvard-educated
lawyer-turned-politician's decision to go easy on
fiscal prudence is understandable, especially with
the leftist allies that support his administration
breathing down his neck.
Chidambaram
allocated 250 billion rupees (US$52 billion) for
social programs in a bid to aid job creation. He
also reaffirmed the government's emphasis on
building up the country's rural infrastructure,
proposing to use a portion of the $133 billion in
foreign exchange reserves to develop roads, ports,
airports and tourism. A new tax has been imposed
on fuel to improve the infrastructure and broaden
health, insurance and education schemes.
Further liberalizing state-controlled
banks, the finance minister proposed a bill to
amend the current bank law and indicated that FDI
in the pension, mining and trade sectors would be
liberalized. Foreign-fund holdings' limit in
state-run banks has been raised to 24% from 20%.
FDI in private banks, it was announced, would be
relaxed to 74% from 49%.
The Bombay stock
exchange's benchmark Sensitive Index (Sensex)
reacted positively to the announcements, going up
by over 100 points to end the day at a record
6,714. The biggest gainers were the government
banks, such as UTI Bank, Union Bank, Andhra Bank,
Bank of India, Canara Bank, Syndicate Bank, Bank
of Baroda and Punjab National Bank.
Chidambaram also announced steps to
strengthen the capital market. Foreign
institutional investors will be permitted to
submit appropriate collateral when trading in
derivatives on the domestic market. Market
regulators will be asked to permit mutual funds to
introduce a gold exchange-traded funds scheme to
enable any household to buy and sell gold in units
for as little as 100 rupees - about $2.
The captains of Indian industry hailed the
budget, some even going as far to call it a "dream
budget". Tarun Das of the Confederation of Indian
Industry, an industry body, said: "We are on a
good wicket as far as the economy is concerned and
reforms are on track. There are so many positives
that it is difficult to find negatives."
A
large measure of relief has been provided to
middle class income tax payers, with a change in
tax brackets. Chidambaram also spelt out
wide-ranging changes in the indirect tax regime,
bringing down the peak customs duty on
non-agriculture products to 15% from the existing
20%. Customs tariffs on a range of items from fuel
to non-agricultural goods, like textile machinery,
have been slashed in a move aimed at bringing
import duties into line with levels prevailing in
other Asian nations. Customs duty on refrigerated
vans has been reduced from 20% to 10%, which will
help the food-processing industry. Duty on
polyester and nylon chips, textile fibers, yarns
and intermediates, fabrics and garments is
proposed to be reduced from 20% to 15%.
The corporate tax rate for domestic firms
has been cut down to 30% from 35%, cheering up the
industry, and assistance for key industries,
including sugar, tea and textiles, has been
announced. The corporate tax rates for foreign
companies have not been changed.
The
minister proposed to reduce the customs duty on
seven specified types of machinery used in the
leather and footwear industry, from 20% to 5%.
Duty on ethyl vinyl acetate (EVA), an input for
the footwear industry, is also proposed to be
reduced from 20% to 10%. Recognizing
pharmaceuticals and biotechnology as sunrise
sectors, Chidambaram reduced the customs duty on
nine specified types of machinery used in these
sectors to 5%.
The military budget has
been increased by 7.8% to 830 billion rupees in
the coming year. Chidambaram said most of this
money would be used to pay for military hardware
and supplies already ordered, and to upgrade the
aging fleet of Russian-built jet fighters and
missile system.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
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