The Indian parliament approved Finance Minister Pranab Mukherjee’s plan for higher taxes to help pare the widest fiscal deficit among the largest emerging markets.
Lawmakers ratified the budget, unveiled on March 16, in New Delhi today. Mukherjee has also proposed subsidy curbs to narrow the fiscal gap to 5.1 percent of gross domestic product in the year through March 2013 from 5.9 percent in 2011-2012.
The finance minister yesterday retreated on other plans outlined in March to clamp down on tax avoidance, seeking to salvage investor confidence in Asia’s third-largest economy. Aside from the budget gap, India is also grappling with a record trade shortfall that’s pressured the rupee, the slowest economic growth in three years and lingering inflation.
“There is no denying to the fact that GDP has come down but it is to do with international situation as we are not insulated,” Mukherjee said in parliament today adding that collective effort by political parties was needed to speed up economic recovery.
The budget increased both the service tax rate and the excise duty to 12 percent from 10 percent. Mukherjee has proposed to restrict a subsidy program spanning diesel to fertilizers to less than 2 percent of GDP this fiscal year.
The applicability of the planned General Anti-Avoidance Rule, or GAAR, will be delayed until the fiscal year beginning April 2013, Mukherjee said yesterday. The decision spurred the rupee and stocks.
The currency weakened 0.4 percent to 53.146 per dollar today, after rising 1.1 percent yesterday. The BSE India Sensitive India of stocks slid 2.2 percent. The rupee tumbled 16 percent last year, the most in Asia.
India’s fiscal gap is the worst among the so-called BRIC nations that also include Brazil, Russia and China. The nation also has the fastest BRIC inflation.
Standard & Poor’s lowered India’s sovereign credit outlook to negative from stable on April 25, citing weaker investment and a deterioration in the current account, the broadest measure of trade. The move took the economy a step closer to so-called junk status.
Reserve Bank of India Governor Duvvuri Subbarao cut India’s repurchase rate by half a percentage point on April 17 to 8 percent, seeking to bolster expansion with the first reduction since 2009. Inflation was 6.89 percent in March.
The government estimates that India’s economy expanded 6.9 percent in 2011-2012, the slowest pace since in three fiscal years, hurt by costlier credit and slower exports.
Mukherjee said this month that India will focus on a recovery driven by domestic demand and that he is “confident” of 8 percent to 10 percent annual growth in India in coming years.