Eye on election, India surprises with spending surge

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By Tony Munroe and Matthias Williams | March 1, 2013 1:21 AM EST

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.

Stocks, bond prices and the rupee all fell despite Chidambaram's vow to cut the fiscal deficit to 4.8 percent of gross domestic product (GDP) in the year starting April 1, which some analysts said rested on questionable revenue assumptions given his hefty spending targets.

"While the finance minister has, we believe, presented a prudent budget, the question is whether the numbers are achievable," investment bank Nomura said in a research note.

Rating agency Standard & Poor's (S&P) said the budget would not affect its assessment of India's creditworthiness.

There had been widespread expectations, fuelled in part by comments by finance ministry officials, that Chidambaram would present an austere budget to parliament amid the threat of a sovereign rating downgrade to "junk" status.

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 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."

S&P said that, while the "relatively prudent" budget would have no impact on India's BBB-minus credit rating, it was concerned that India remained vulnerable to spikes in oil and other commodity prices that could force it to spend more than it planned.

Total budget expenditure will rise by an unexpectedly high 16 percent in the 2013/14 fiscal year to 16.65 trillion rupees (203 billion pounds).

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, or 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.

Chidambaram has focused on winning back foreign investors unnerved by proposals from his predecessor, Pranab Mukherjee, to tax merger deals retrospectively and clamp down on tax evasion. Since September, he has implemented a spate of investor-friendly reforms, including allowing entry of foreign supermarkets.

"India, at the present juncture, does not have the choice between welcoming and spurning foreign investment. If I may be frank, foreign investment is an imperative," he said.

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.

An added surcharge on local firms with incomes of more than 100 million rupees and a 10 percent surcharge on individuals with taxable incomes topping 10 million rupees - 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.

(Additional reporting by Ross Colvin, Malini Menon, Aradhana Aravindan, Arup Roychoudhury, Satarupa Bhattacharjya, Suvashree Dey Choudhury, Frank Jack Daniel, Annie Banerji, Matthias Williams, Anurag Kotoky, Swati Bhat, Harichandan Arakali, Devidutta Tripathy, Manoj Kumar and Rajesh Kumar Singh; Writing by Tony Munroe and John Chalmers; Editing by Alex Richardson)

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