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FM bets on tax cuts, fiscal discipline to fuel growth

The Finance Minister has shifted the growth logic from a decades-old reliance on more government spending to a new one on tax breaks, reports Narayanan Madhavan.
Hindustan Times | By Narayanan Madhavan, New Delhi
UPDATED ON MAR 01, 2008 01:10 AM IST

Tax less, grow more, get more revenues, spend more, grow again. Finance Minister P Chidambaram has shifted the growth logic from a decades-old reliance on more government spending to a new one on tax breaks that would put more money into private hands to fuel growth.

Buttressing this incentive to boost disposable incomes is a bid to widen the farmers' constituency - and purchasing power - by a Rs. 60,000-crore debt waiver package for an estimated 4 crore farmers, and more infrastructure spending to boost demand on the other.

The minister said he expected more honesty in response to reasonable tax rates administered without fear or favour in order to boost revenues.

Chidambaram said fiscal deficit is expected to drop to 3.1 per cent in 2007/08 from the targeted 3.3 per cent and revenue deficit would stop at 1.4 per cent against the targeted 1.5 per cent. Fiscal deficit is targeted at an ambitious 2.5 per cent in 2008/09, helping to rein in inflation.

"We see upside risk to this number on account of the slowing GDP growth, the impending sixth pay commission hikes, higher interest costs on sterilisation bonds, growing interest payments on oil subsidy bonds and the continuation of various subsidies," said Sonal Varma, economist at Lehman Brothers.

The government has so far not provided money for pay hikes to government staff or for debt relief to farmers.

Chidambaram aims to cut deficit through a happy tightening of unproductive "non-plan" expenditure. Total expenditure is expected to rise by only 6 per cent in 2008/09 despite an increase of about 17 per cent in development-oriented plan expenditure.

Indirect tax reliefs will cost the government Rs 5,900 crore, but direct tax revenues are not expected to suffer from the slashing of personal tax rates.

The farmers debt relief package will be paid for by the government from its coffers, thus protecting the banking system from picking up the burden. "Provisions (made by banks) will disappear. It is a positive budget for banks," HDFC chairman Deepak Parekh said.

"Increased allocation in various sectors such as Infrastructure development under rural infrastructure fund (Rs 14,000 crore), National Highway Development project (around Rs 12,660 crore), Bharat Nirman Yojana (Rs 31,280 crore) etc. will further go to stimulate the steel demand in the country," said Moosa Raza, president of the Indian Steel Alliance.

However, small and medium enterprises (SMEs) have been left out of the industrial party, said Bikky Khosla of Trade India, who also overseas small business initiatives in industry chamber Assocham. "We are supposed to be the backbone of the economy. There is zero in the budget for us," he said.

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