Mukherjee Seeks to Ease India Tax Burden, Cut Deficit as Inflation Gains

India’s government unveiled a budget proposal designed to ease the impact of inflation on lower-income earners by exempting more people from paying taxes, while inviting foreign investment in infrastructure and accelerating sales of state-owned assets.

The budget deficit will narrow to 4.6 percent of gross domestic product in the financial year starting April 1 from 5.1 percent of GDP in the previous year, Finance Minister Pranab Mukherjee said in his budget speech in New Delhi today.

The economy grew 8.2 percent last quarter while inflation stayed above 8 percent, adding pressure on Prime Minister Manmohan Singh’s government to join Hong Kong and Singapore in expanding benefits to help people cope with price pressures. Stocks rose as Mukherjee said India will allow overseas investment in domestic mutual funds, while bonds gained on plans to cut the budget shortfall.

“India’s budget deficit is moving in the right direction, but at a fairly modest pace,” said Brian Jackson, a Hong Kong- based emerging-markets strategist at Royal Bank of Canada. “The onus will remain firmly on the Reserve Bank of India to adjust monetary policy in order to get inflation under control.”

Total spending will rise 13.4 percent to 12.6 trillion rupees ($278.8 billion) from a year earlier, Mukherjee said.

Stocks Gain

The Bombay Stock Exchange’s Sensitive Index, which has declined about 13 percent since Dec. 31, gained 0.7 percent at the 3:30 p.m. close in Mumbai. The rupee strengthened 0.1 percent to 45.27 against the dollar, while the yield on the 8.13 percent bond due September 2022 dropped five basis points to 8.09 percent.

India’s benchmark wholesale-price inflation rate averaged 9.4 percent in the nine months through December, the most in the past decade, the finance ministry said in a report on Feb. 25. The price gauge rose 8.23 percent in January.

The Reserve Bank, which has raised its benchmark repurchase rate seven times in the past year to 6.5 percent, signaled more increases on Jan. 25 as it urged the government to cut subsidies and tighten the fiscal policy alongside rising borrowing costs to defeat inflation.

Kerosene Subsidy

Mukherjee said today the government plans to give cash directly to the poor to buy kerosene and remove a subsidy on the purchase of the fuel. The government plans debt sales of 4.17 trillion rupees in the year starting April 1, less than an estimated 4.47 trillion rupees in the previous year, according to the budget.

“Fiscal consolidation is in the right direction,” central bank Deputy Governor Subir Gokarn said at a press conference in Mumbai. “The borrowing doesn’t provide a shock in the sense that the absolute borrowing is roughly going to be the same and so, it does not pose much of a challenge in managing.”

Singh’s government faces five state elections this year and said last week that its “foremost” priority is to curb inflation, which reduces purchasing power in a nation where the World Bank estimates more than three-quarters of the people live on less than $2 a day.

Street Protests

Thousands of workers from across India led by trade unions marched toward the country’s parliament in New Delhi on Feb. 23, the fourth major rally in the capital in a year, protesting rising food prices, low wages and job insecurity.

Singh is also battling corruption allegations and on Feb. 22 agreed to a parliamentary probe into the sale of second- generation mobile-phone licenses, surrendering to three months of opposition demands that had derailed legislation and eroded investor confidence. The final parliament session of 2010 was the least productive in 25 years.

Given the pressures faced by the government, economists including Morgan Stanley’s Singapore-based Chetan Ahya had expected the government to provide income-tax relief to the urban poor.

Mukherjee said incomes below 180,000 rupees won’t be taxed from the next financial year, increasing the threshold from 160,000 rupees. He also announced a 1 percent interest-rate subsidy for housing loans of up to 1.5 million rupees.

Infrastructure Shortage

The finance ministry estimates that India produces about 10 percent less electricity than it needs, and roads, which handle 65 percent of the nation’s cargo, are plagued by single lanes and irregular surfaces, boosting the cost of goods and services.

To ease infrastructure bottlenecks and reduce inflationary pressures, India plans to spend 23 percent more on roads, ports and power and increase the limit for foreign institutional investment in infrastructure bonds to $25 billion from $5 billion, Mukherjee said.

India will also allow companies to issue tax-free bonds worth 300 billion rupees to finance infrastructure projects, the minister said.

The country will build capacity to store 4 million metric tons of food grain by March 31, 2012, Mukherjee said, to help boost farm supplies and drive down food prices. The minister said he has directed commercial banks to step up loans to farmers by 27 percent to 4.75 trillion rupees.

Singapore’s Plan

Singapore plans to spend S$6.6 billion ($5.2 billion) on benefits including tax cuts and rebates, the government said on Feb. 18. In Hong Kong, relief measures announced this month to help residents cope with inflation included an electricity subsidy and a waiver of property rates.

Mukherjee has room to maneuver in next year’s budget because less bonds are due for repayment and the government in May earned 677.2 billion rupees from the sale of third- generation phone licenses to companies including Vodafone Group Plc, more than the budgeted 350 billion rupees.

The government needs to repay 741.3 billion rupees in the coming fiscal year, compared with 1.12 trillion rupees in the 12 months through March, according to the finance ministry.

India aims to raise 400 billion rupees from the sale of stakes in state-run companies, Mukherjee said. Proposed sales of stakes in Indian Oil Corp., the country’s biggest refiner, and Steel Authority of India Ltd., its second-largest producer of the alloy, may help raise about 104 billion rupees next fiscal year, according to data compiled by Bloomberg.

Tax Revenue

Tax revenue is also getting a fillip as economic growth accelerates. Gross collections may rise 25 percent to 9.32 trillion rupees in the financial year starting April 1, Mukherjee estimated.

India will maintain the excise tax rate at 10 percent, refraining from raising the levy to the 12 percent level that existed before the global financial crisis to help boost investment, the minister said.

He said the government plans to increase the service tax on air travel and will extend the levy to include new businesses such as air-conditioned hospitals.

India’s $1.3 trillion economy may expand by as much as 9.25 percent in the next financial year, the fastest pace since 2008, the annual Economic Survey prepared by advisers to Mukherjee said on Feb. 25.

“The government is really now bringing in a lot of fiscal discipline into the country,” said Robin Banerjee, chief financial officer of Suzlon Energy Ltd., India’s largest wind- turbine maker. “If fiscal discipline comes back, there will be enhanced investment in the country from the international sector.”

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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