NEW DELHI (Reuters) - The government boosted spending on hundreds of millions of its poor in a budget gambling on brisk economic growth to cover the cost of appeasing voters angered by corruption scandals and stubbornly high inflation.
The 2011/2012 fiscal plan unveiled on Monday met with market scepticism, with economists saying New Delhi’s budget deficit and economic growth forecasts looked too optimistic, especially given high global oil prices that may inflate its subsidy bill.
Prime Minister Manmohan Singh’s Congress party faces elections in five states this year amid criticism over inflation and its handling of several high-level corruption scandals and, as expected, the budget was heavy on spending and light on economic reforms sought by investors.
“Both the borrowing and fiscal deficit numbers have been worked out taking into account the most optimistic macro-economic scenarios, which in all likelihood is not going to be the real situation.” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
One of the budget’s centrepieces is a plan to provide cheap grain for millions of poor, promising some relief to those hit the hardest by high food and energy costs, but sparking worries about its huge cost.
For commentators, the budget was a sign that the ruling Congress party chief Sonia Gandhi and her left-leaning advisors had won an upper hand over reformist camp led by the prime minister that got weakened by corruption scandals.
“This is tending towards a populist budget, as it punches all the buttons,” said Manoj Joshi, comment editor of Mail Today newspaper.
In his budget speech, Finance Minister Pranab Mukherjee said social spending would rise by 17 percent in 2011-12, helping the 500 million Indians who live on less than $1.25 a day.
New Delhi expects Asia’s third-largest economy to grow by nearly 9 percent in the next fiscal year, generating enough tax revenue to narrow the fiscal deficit to 4.6 percent of GDP from 5.1 percent this year.
Consequently, the government to set next year’s gross market borrowing target at 4.17 trillion rupees, markedly below the 4.5 trillion rupee forecast in a Reuters poll.
India’s economy grew a slower-than-expected 8.2 percent in the October to December quarter from a year earlier, government data on Monday showed, though Mukherjee said it was still on track to expand 8.6 percent in the fiscal year that ends in March 2011.
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The yield on India’s benchmark 2022 bond rose 2 basis points to 8.11 percent on news of increased social spending before falling to 8.05 percent after the fiscal deficit and borrowing targets were announced.
In an apparent effort to sustain buoyant growth, the government unexpectedly retained some of the tax cuts introduced during the global economic crisis, which may keep the Reserve Bank of India (RBI) on stand-by to raise interest rates again.
“With fiscal policy unlikely to make much of a contribution to curbing price pressures, it seems that the onus will remain firmly on the Reserve Bank of India,” said Brian Jackson, economist at Royal Bank of Canada in Hong Kong.
Among the reforms that failed to make it into the budget bill was a provision allowing foreign investment in the modern supermarket sector that investors say India needs to boost productivity.
Another key reform, implementation of a long-delayed goods and services tax to streamline revenue collection, is unlikely to come into effect in April 2012, as had been hoped.
Mukherjee, however, defended the government’s reform credentials and the budget.
“At times the biggest reforms are not the ones that make headlines, but the ones concerned with details of governance which affect the everyday life of the common man,” Mukherjee told parliament.
One of the initiatives announced in the budget is a pilot scheme due to start in March that will pay some fuel and food subsidies directly as cash to customers.
In recognition that low farm productivity, supply bottlenecks and waste were among the root causes of the country’s high food inflation, much of the budget focused on the farming sector.
Mukherjee said the limit on foreign investment in corporate infrastructure bonds would be raised by $20 billion, infrastructure debt funds would be set up. In addition, cold storage chains would be given infrastructure status, making them eligible for preferential borrowing rates to build facilities.
As much as 40 percent of India’s fruit and vegetable production is wasted because of poor transportation and a lack of such facilities.
While the moves to bolster infrastructure development were broadly anticipated, implementation of such initiatives has often fallen behind targets, hampered by power shortages, poor roads and other infrastructure.
The government’s goal to raise about 400 billion rupees by selling states in state companies also came in line with expectations, meaning New Delhi will not be able to use windfall gains, such as this year’s revenues from the sale of 3G telecom licences, to plug budget holes.
In a move aimed to put a lid on domestic prices, the budget announced an increase in the duty on iron ore exports by fourfold to 20 percent, helping keep costs down for domestic steel producers but possibly pushing up global iron ore prices.
The budget will also give a 3 percent interest subsidy to farmers in 2011/12, up from 2 percent, and raises the target for loans to the farm sector to 4.75 trillion rupees($105 billion) from 3.75 trillion rupees previously.
(US$1 = 45.31 rupees)
Additional reporting by Jonathon Burch, Rajesh Kumar Singh and Jo Winterbottom in Delhi; Writing by Alistair Scrutton and Tony Munroe; Editing by Tomasz Janowski