Business Outlook: INDIA
FRESH FUEL FOR INDIAN INFLATION
Rattled by recent defeats at the ballot box, India's ruling Congress Party has put forth a budget heavy on populist spending, along with some continued economic reform and inflation-fighting measures.
The highlights of India's budget for fiscal 1995-96, which begins Apr. 1, include a five-year tax holiday on income from infrastructure spending, cuts in import duties for goods ranging from plastics to computers, and increased spending on such welfare programs as subsidized pensions and housing.
India's business community had hoped Prime Minister P.V. Narasimha Rao's government would scrap the 15% tax surcharge on corporate earnings. Instead, the budget left corporate-tax rates unchanged and cut government capital outlays. So, after the budget was released on Mar. 15, the Bombay Stock Exchange fell 88 points, or 2.5%. Then on Mar. 20, the stock market was closed when a brokerage firm defaulted.
Despite the budget letdown, India's industrial sector has benefited from the market reforms started in 1991. On Mar. 14, Finance Minister Manmohan Singh said that industrial output grew 8% in the year ending in March. In the same period, real gross domestic product rose 5.3%, its strongest pace in four years, and the government's deficit as a percentage of gross domestic product fell to 6.7% from 7.3%.
The economy is expected to rise by about 6% this year, but rapid growth has stirred up price pressures. Faster money-supply growth and more expensive raw materials have increased the inflation rate. Wholesale prices--India's key inflation gauge--are rising 11.5% this fiscal year, up from 10.8% a year ago (chart). Singh called inflation "a serious problem." That means India may have to raise interest rates soon.
The cuts in excise taxes should help hold down price pressures from imported goods. But if the Congress Party feels the need to initiate more welfare spending to appease poor voters, the resulting fiscal pressures could force inflation to stay above 11% this year.BY JAMES C. COOPER & KATHLEEN MADIGAN