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India's Budget Offering Forgiveness On Farm Debt

With an eye on upcoming elections, India's Finance Minister Palaniappan Chidambaram waived farm debts and cut personal taxes, in an attempt to boost consumption amid slowing economic growth.

In his fifth annual budget presentation, the minister increased exemption limits for personal taxes to 150,000 rupees ($3,755.16), from 110,000 ($2,753.79) rupees, in a nation where only a third of the population pays taxes. He left corporate tax rates and surcharges unchanged.

He also cut excise duties on pharmaceutical goods--exempting AIDS drugs entirely--and small and hybrid cars and abolished duties on wireless data cards. Jewelry exports, which suffered last year as the rupee appreciated against the dollar, also got duty relief on select gems.

Indian automakers were expecting some budget relief after their sales suffered last year because of tightening interest rates. Loans finance a preponderance of the passenger vehicles purchased in India.

"The budget was about populist measures, but the finance minister has shown some commitment to financial reforms," said D. K. Joshi, chief economist at Crisil, the Indian arm of ratings agency Standard and Poor's.. "He's given a fillip to growth by reducing excise duties on key sectors like autos, and has put more money to spend into the hands of consumers."

Chidambaram forecast that the fiscal deficit will be 2.5% of GDP for the fiscal year 2009, down from an estimated 3.3% this year. Economic growth for the quarter ended Dec. 31 stood at 8.4%, compared to 8.9% in the previous quarter, the government said Friday. Last fiscal year, GDP growth was 9.6%.

Agriculture has "struck a disappointing note," Chidambaram said in Parliament. Growth rates in the primary sector are expected to be about 2.8% for the year ending March 31. Agriculture accounts for the livelihoods of about two-thirds of India's population, and consequentially has a powerful voting base.

Farmers don't pay taxes in India. And on Friday, Chidambaram attempted to ensure that those in need also don't have to repay loans. He announced a debt relief package that is expected to cost the exchequer 600 billion rupees ($15 billion), putting additional pressure on government finances.
Last year, Prime Minister Manmohan Singh estimated the government's food, fertilizer and oil subsidies were likely to exceed $25 billion. But, as the ruling coalition faces elections in five states this year and general elections that must be held before May 2009, it wants to ensure the voters are happy.

The markets, however, were none too happy with the budget, after Chidambaram hiked taxes on short-term capital gains, to 15%, from 10%. The benchmark Sensex on the Bombay Stock Exchange was down 2.7%, at 17,364.51. The National Stock Exchange's Nifty fell 2.7%, to 5,143.25.
"The measures are likely to have a short-term impact on the markets, but there's no immediate cause for concern," said Samiran Chakraborty, chief economist at ICICI Bank. "Though the government is indicating there could be further measures to tackle capital flows if they don't moderate on their own.." Last year, a surge of capital inflows increased inflationary pressures, prompting the central bank to tighten interest rates. Inflation for the week ended Feb. 16 stood at a high of 4.89%, an eight-month high.

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