Budget focuses on farms, gears up for vote

By V. Ramakrishnan and Unni Krishnan

NEW DELHI (Reuters) - India's government promised higher spending for ailing farms and funds for rural revival in its budget on Friday, but it stuck to fiscal goals and pledged to keep inflation under control ahead of elections due in 2009.

Finance Minister Palaniappan Chidambaram, presenting the fifth and last full budget of the left-leaning administration, proposed $15 billion to write off debt owed by small farmers to banks in a move analysts said was aimed at the ballot box.

He pledged higher spending on health and education to spread the benefits of an economic boom beyond the cities to rural voters and proposed raising the income tax threshold. Duties on small cars and two-wheelers will be cut to boost manufacturing.

He left corporate tax rates unchanged but said he was raising a tax on short-term capital gains, aimed at share transactions, to 15 percent from 10 percent, helping send the stock market down 1.4 percent on the day.

"The emphasis on social sectors like health, education and the rural economy do suggest that the budget is leaning towards some populist measures," Yes Bank chief economist Shubhada Rao said, although she noted excise cuts would help dampen inflation.

The rupee slipped against the dollar after the budget but the benchmark bond yield eased 5 basis points on the day to 7.55 percent after the finance minister said he expected to better his fiscal targets for the current financial year.

Chidambaram said the government's aim was to boost employment and abolish poverty and inequality in the country of 1.1 billion people, where some 260 million struggle on less than $1 a day.

Television channels showed farmers celebrating the loan write-off, but the government's communist allies said many were indebted to private money lenders and would not benefit.