Finance Minister P Chidambaram is expected to use his annual budget address on Friday to prime the economy ahead of general elections scheduled for 2009, but he won't throw away fiscal targets for electoral gains.
Chidambaram, a pro-reform politician, will read out the fifth and final budget of his left-leaning coalition's term against a backdrop of slowing but still impressive economic growth, accelerating inflation and an uncertain global economy.
The government by law has to cut the federal budget deficit to 3 per cent of the gross domestic product in the next fiscal year that starts on April 1 from 3.3 per cent or lower expected for the current year.
"It is an election year and he has the flexibility to address some populist concerns," said DK Joshi, economist at domestic ratings agency Crisil. "The fiscal situation is good and that gives him enough legroom on the expenditure front."
Spending is likely to focus on the sluggish agriculture sector, healthcare, education and infrastructure to spread the benefits of 8-9 per cent economic growth from urban and wealthy voters to the 60 per cent or more of the 1.1 billion population toiling in rural areas.
With tax receipts up nearly 40 per cent this fiscal year, the minister might phase out a 10 per cent surcharge on corporate tax and on income tax of higher earners, analysts say.
He might raise the exemption limit on personal income. Rapid growth is not necessarily a mass vote-catcher in India, as the opposition Bharatiya Janata Party found to its cost in 2004, but inflation is historically a vote-loser.
A general election has to be called before May 2009. "He has to ensure that inflation is under control and growth does not get derailed," Joshi said.
Headline wholesale price inflation hit a six-month high of 4.35 per cent in early February and is set to creep higher after fuel prices were raised. Consumer prices are rising at about 6 per cent a year.
Tax on the poor
The prime minister calls inflation a tax on the poor as it hits them first and the central bank says it is high by world standards and must be brought down.
Food prices are rising at home and abroad and to stimulate sluggish farm growth Chidambaram is expected to offer farmers more credit, funds for irrigation and crop-boosting schemes.
He may also cut some import duties, such as on edible oils.
A panel reviewing wage increases for over 3 million government workers is likely to submit its recommendations in the coming 2008/09 fiscal year which starts in April, so Chidambaram will have to make provisions for a substantial payout.
But economists say he is unlikely to blot his record of tidying up India's messy public finances and will stick to reducing the fiscal deficit.
The law says India must cut its fiscal deficit to 3.0 per cent of gross domestic product by 2008/09 and erase its revenue deficit, the gap between tax revenue and current expenditure.
Chidambaram expects to meet both goals but economists say the revenue deficit might be tough as spending reforms have been slow and India relies on rising taxes to fund programmes. "The focus will be on education and infrastructure while retaining the emphasis on fiscal consolidation," Rajiv Malik, economist at JP Morgan, wrote in a research note.
Modernising infrastructure to lower the cost of doing business and aid expansion is an immediate priority. Growth has slowed to an estimated 8.7 per cent this fiscal year from a scorching 9.6 per cent in 2006/07.
"Movement of goods is very essential and one needs to put efficiency (in) the roads, ports, railways. This would have a beneficial impact on inflation," said Suresh Tendulkar, a member of Prime Minister Manmohan Singh's Economic Advisory Council.
Firm interest rates to stem price pressures have curbed demand and a stronger rupee has hurt some exports. Economists say labour-intensive leather and textile exporters could see relief.