India’s government pledged to reduce the fiscal gap to the lowest in seven years in an interim budget before elections due by May, while boosting defense spending and cutting taxes on cars, mobile phones and television sets.
The budget deficit will narrow to 4.1 percent of gross domestic product by March 31, 2015 from an estimated 4.6 percent in the current fiscal year, which is lower than an earlier target of 4.8 percent, Finance Minister Palaniappan Chidambaram told lawmakers today in New Delhi. The budget would provide funds for several months until a new parliament is elected.
“I can confidently assert that the economy is more stable today than what it was two years ago,” Chidambaram said, pointing to lower deficits, moderating inflation, higher growth and a stable exchange rate. “Analysts and rating agencies had acknowledged our efforts some months ago and no longer speak about a downgrade.”
Prime Minister Manmohan Singh faces a slumping economy that’s hurting tax revenues as rupee weakness raises the cost of oil imports and fuel subsidies. Standard & Poor’s warned in November that it may strip India of an investment-grade rating awarded in 2007 unless the election leads to a government capable of reviving growth.
“There is some degree of populism in this budget, but this is the best he could’ve done given that it’s an interim budget,” said Gaurav Kapur, a senior economist at Royal Bank of Scotland Group Plc in Mumbai. “I see the budget estimates as somewhat aggressive, and we’ll have to wait and see what the new government comes out with.”
The yield on the government bond due November 2023 closed little changed at 8.81 percent after Chidambaram announced gross borrowing of 5.97 trillion rupees ($96 billion) in the fiscal year starting April 1 from a revised 5.64 trillion rupees for the current year.
The government had estimated gross borrowing at 6.29 trillion rupees for the current fiscal year in the budget presented a year ago. Chidambaram projected a revenue deficit of 3 percent of GDP for the financial year through March 2015.
The rupee, down about 12 percent versus the dollar in the past year, rose 0.1 percent. The S&P BSE Sensex index advanced 0.5 percent.
Chidambaram said the current-account deficit would be contained at $45 billion in the fiscal year through March, compared with $88 billion a year earlier. The government also expects to add about $15 billion to foreign reserves, he said.
The government will review curbs on gold imports imposed last year with the aim of keeping the current-account deficit under control, Chidambaram told reporters in New Delhi today.
Excise tax rates on sport-utility vehicles, small cars and motorcycles would be cut until June 30, Chidambaram said, while urging lawmakers to pass a goods and services tax. He also reduced the excise duty for a range of consumer goods, including washing machines, DVD players and microwave ovens.
The tax cuts will probably cause a revenue loss of 3 billion rupees in the 40 days, and could be recovered if there are higher sales, Chidambaram told reporters.
Defense spending would rise by about 10 percent to modernize the country’s military, he said in the speech, while also increasing funds for soldier pensions. Chidambaram also partially waived interest payments on student loans over the past four years.
“What the finance minister has done is spelled out the road map for whomever comes to power next,” said S. Gopalakrishnan, president of the Confederation of Indian Industry and co-founder of Infosys Ltd. “Whichever government comes back will be in a position to spur economic growth, should they enjoy stable leadership.”
Opinion polls show the main opposition Bharatiya Janata Party winning the most seats in national polls while falling short of a majority. The BJP will win 202 seats in the 545-member lower house, compared with 89 for Congress, its lowest tally on record, according to a Times Now and C-Voter poll released Feb. 13.
The Congress-led government’s second term in office has been marred by graft scandals, sluggish economic growth and Asia’s fastest consumer-price inflation, which averaged about 10 percent in the past year. Singh said last month his government could’ve done a better job at controlling inflation after the Congress Party got trounced in state elections.
Reserve Bank of India Governor Raghuram Rajan has said that a lower fiscal deficit is crucial to curbing inflation and boosting economic growth. Citing price pressures, the central bank unexpectedly raised the policy rate to 8 percent from 7.75 percent on Jan. 28, the third increase since Rajan took charge in September.
A central bank panel last month proposed reducing CPI to 8 percent within one year and 6 percent by 2016, and that the RBI should then adopt a 4 percent target with a band of plus or minus two percentage points. Consumer price gains slowed to 8.79 percent in January from 9.87 percent in December.
Chidambaram said today the RBI must strike a balance between price stability and growth, while adding that the elected government must determine the pace of growth and policies that help the economy expand.
“In a developing economy we must accept that when our aim is high growth, there will be a moderate level of inflation,” he said in the speech, without defining a target.
Nations from Brazil to Turkey have also raised rates to shield their economies and currencies from effects of reduced U.S. monetary stimulus, which has contributed to a 4 percent decline in the MSCI Emerging Markets Index this year. U.S. Federal Reserve Chairman Janet Yellen on Feb. 11 pledged to maintain her predecessor’s policies by scaling back stimulus in “measured steps.”
“The challenges that we face are common to all emerging economies,” Chidambaram said in the interim budget speech. “Only a handful on countries were able to keep their head above the water, and among them was India.”
India forecasts its economy will expand 4.9 percent in the 12 months through March 31, faster than the decade-low expansion of 4.5 percent last year, the statistics ministry said this month. If inflation slows, Asia’s third-biggest economy can grow between 5 percent and 6 percent in the fiscal year starting April 1, the RBI predicts.
The U.S. and Europe will be at the forefront in powering a pickup in global growth this year, to 3.7 percent from 3 percent in 2013, according to the International Monetary Fund.
“Consumer durables, autos and manufacturing got the help they so desperately needed,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry. “These are the small steps needed to stir economic recovery. Now who will take the next step forward is the question we are all awaiting an answer to.”