BREAKINGVIEWS-Stern budget will help India shrug off bad past

Thu Feb 28, 2013 3:43pm IST

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Andy Mukherjee

SINGAPORE, Feb 28 (Reuters Breakingviews) - When Palaniappan Chidambaram returned to the Indian finance ministry last summer, he was widely expected to do something to help the economy recover from its recent bad past of slow growth, high budget and current-account deficits, stubborn inflation, elevated interest rates and inadequate investment. In Thursday's budget he has lived up to most of those expectations.

Although next year's elections put a limit on how much the Indian government can control its spending, Chidambaram has gone slow in expanding subsidies. For instance, he has allocated just a fifth as much as proponents of the yet-to-be-passed food security bill wanted. Politics might yet force a larger handout later this year, but at least he's resisting fiscal suicide.

The welfare state can only be expanded safely after the government's near-complete capture of household financial savings has ended. Only then will the private sector be able to borrow at viable interest rates, allowing growth to revive. The finance minister is moving in the right direction. He plans to limit the government's net borrowings to 4.84 trillion rupees ($89 billion) in the year that begins on April 1, virtually unchanged in nominal terms from this year and a lower percentage of GDP.

Fiscal restraint should boost the nation's overall financial savings, which have collapsed over the past few years as the government's profligacy led alarmed households to buy imported gold. In turn, higher domestic savings should reduce both India's record-high current account deficit, almost 5 percent of GDP, and the nation's dependence on hot money inflows to fund that deficit.

Chidambaram's expectation of a 19 percent increase in tax collections next year is reasonable. It requires nominal GDP growth to increase about 12 to 13 percent, plus the receipts from a higher tax rate on most companies and the richest 43,000 individual taxpayers.

The focus of expenditure control is on limiting the government's current consumption. But Chidambaram has not forgotten the future. The budget for much needed capital spending has gone up a whopping 37 percent.

The stock market is disappointed because investors had extremely high expectations. But what the budget lacks in flash, it more than makes up for in substance.

CONTEXT NEWS

- Indian Finance Minister Palaniappan Chidambaram said he would prune the budget deficit in the fiscal year starting April 1 to 4.8 percent of GDP, from an estimated 5.2 percent in the current year. The federal government's Feb. 28 budget targeted net borrowings of 4.84 trillion rupees for the upcoming financial year, compared with a previously budgeted 4.9 trillion rupees for the current year.

- Reuters: India budget increases spending, taxes the rich

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- For previous columns by the author, Reuters customers can click on

(Editing by Edward Hadas and David Evans)

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