* Chidambaram announces higher-than-expected spending for
* Fiscal deficit to hit 5.2 pct of GDP in current year; 4.8
pct in FY 14
* Quarterly GDP data show growth sliding to 4.5 pct
* S&P says "relatively prudent" budget won't have impact on
* Stocks, bond prices, rupee all fall after budget
By Manoj Kumar and Rajesh Kumar Singh
NEW DELHI, Feb 28 India unveiled a surge in
government spending on Thursday, despite expectations of an
austerity budget to shore up its finances, imposing new taxes on
the rich and large companies to fund a dash for growth ahead of
an election due by next year.
The extent of the slowdown gripping Asia's third-largest
economy was underlined by data released just hours after Finance
Minister P. Chidambaram delivered his budget for the coming
fiscal year, showing GDP growth tumbled to 4.5 percent in the
October-December quarter, its lowest in nearly four years.
Chidambaram, whose reformist zeal has made him a darling of
financial markets since his appointment last August, focused on
revenue-raising measures rather than spending cuts, a sign,
analysts said, of his difficult balancing act ahead of a general
election that must be held before the middle of next year.
Many private economists expressed scepticism at
Chidambaram's rosy revenue assumptions and were dismayed by the
sizeable increase in public spending in a country facing its
sharpest economic downturn in a decade.
Total budget expenditure will rise by 16 percent in the
2013/14 fiscal year to 16.65 trillion rupees ($309 billion).
Investors have until now cheered on the energetic and
forceful Chidambaram for his efforts to shore up India's
finances by hiking fuel prices, opening up the retail and
airline sectors to foreign players and curb government spending.
But stocks, bond prices and the rupee all fell on Thursday,
despite his vow to cut the fiscal deficit to 4.8 percent of
gross domestic product (GDP) in the year starting April 1.
"The honeymoon is over," BNP Paribas said in a critique that
questioned his budget arithmetic. "The finance minister ... has
pencilled in a capex boom, financed by populist tax hikes on the
rich, a sharp pickup in disinvestment proceeds and, that old
friend, implausible control of subsidy spending."
The budget did achieve Chidambaram's immediate goal of
staving off a credit rating downgrade, for now. Global agencies
Standard & Poor's (S&P) and Fitch said the budget would not
affect their assessment of India's creditworthiness. Both have
threatened to downgrade India's sovereign rating to "junk"
unless it gets it finances under control.
There had been widespread expectations, fuelled in part by
comments by finance ministry officials, that Chidambaram would
present an austere budget to parliament. But the spending plan
appeared to have been drawn up with voters in mind, several
economists and industrialists said.
The coalition government led by Sonia Gandhi's Congress
party, mired in corruption scandals and widely derided as
incompetent in the face of the economic slowdown, faces a
struggle for re-election in polls due by May 2014.
"With a general election not much (more) than a year away,
political pressure from within the Congress Party may well have
had an influence on the make-up of the finance minister's
budget," Credit Suisse said.
REPUTATION ON THE LINE
Chidambaram, a three-time finance minister seen as a
potential candidate for prime minister in 2014, has staked his
reputation on cutting swollen fiscal and current account
deficits that have alarmed the rating agencies.
"Faced with a huge fiscal deficit, I had no choice but to
rationalise expenditure," he said in his budget speech, which
was seen as a balancing act to avert a downgrade while meeting
his party's demands for vote-winning spending. "We took a bitter
dose of medicine. It seems to be working."
Next year's fiscal deficit target is in line with
expectations but assumes hefty revenue growth, including 558
billion rupees from the sale of government stakes in companies,
more than double the 240 billion rupee target for the current
year, which falls short of the initial target.
The budget also assumes revenue of 408.5 billion rupees from
telecoms sector fees, more than double what it will generate
this year, with its next auction of mobile airwaves poised to
flop after attracting just one bidder.
"The government may fall short of its tax and disinvestment
targets and end up cutting spending closer to the end of the
year to attain its fiscal deficit target," said A. Prasanna,
economist at ICICI Securities Primary Dealership Ltd.
Net market borrowing of 4.84 trillion rupees for the new
fiscal year met investor hopes that the figure would not top 5
trillion rupees, but the gross figure exceeded expectations.
The budget included several measures to spur investment both
in markets and by corporations, including an incentive on
investments in plant and machinery exceeding 1 billion rupees
and extending tax breaks for small companies that grow larger,
and an expansion of tax-free bonds for infrastructure.
"India, at the present juncture, does not have the choice
between welcoming and spurning foreign investment," he said.
However, the budget disappointed foreign investors by
failing to deliver a much anticipated cut in withholding taxes
for debt investments and creating confusion with a proposal that
appeared to target tax treaties.
HEY, BIG SPENDER
While the added spending included capital investment that
many have said is sorely needed, including a 29 percent increase
in funding for infrastructure and development, it also included
a 46 percent jump in funding for development programmes in rural
areas, the core voter base of the ruling Congress party.
Chidambaram also hiked the farm ministry's budget by 22
percent, and promised to increase targeted farm loans to 7
trillion Indian rupees ($129.92 billion), from 5.75 trillion
rupees in 2012/13.
He made a smaller-than-expected commitment to food
subsidies, less than 1.2 trillion rupees the food minister said
two weeks ago that India might have to spend.
An added surcharge on local firms with incomes of more than
100 million rupees and a 10 percent surcharge on individuals
with annual taxable incomes topping 10 million rupees ($185,000)
- a level of earnings currently declared by just 42,800 people -
will be put in place for one year.
Dozens of corporate executives, watching a telecast at an
industry event in New Delhi, exchanged nervous smiles as
Chidambaram introduced the surcharge on the rich.
"In the larger scheme of things, I guess that is one way of
reducing his deficit. Am I going to lose sleep over it? No,"
Ganesh Natarajan, CEO of IT outsourcer Zensar Technologies
, said by phone from Pune, where the company is based.