FM proposes steps to tackle fiscal deficit

The new Left-backed Govt is set to take steps in the Budget to tackle high fiscal deficit while raising taxes to boost spending for the poor.

The new Left-backed Government is set to take its first tentative steps to tackle a worrying fiscal deficit while raising taxes to boost spending for the poor in its inaugural Budget on Thursday. Under a law enacted this week, the Government should trim the deficit at least to 4.3 per cent of gross domestic product (GDP) from 4.6 per cent, but it also needs money to fund promises to the impoverished voters who swept it unexpectedly to power.

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Finance Minister Palaniappan Chidambaram will also have to implement measures to improve India's inadequate infrastructure if the economy, Asia's third largest, is to maintain its strong growth.

"We can expect additional taxes on a wide range of fronts and some re-prioritising of expenditure," said an economic adviser with domestic ratings agency ICRA, Saumitra Chaudhuri.

"We can expect some tightness on the fiscal side."

The deficit fell to 4.6 per cent of GDP in the year ended March from 5.4 per cent a year earlier, but economists and markets remain anxious the Congress-led coalition Government could be tempted to go on a spending binge to fund its social promises.

Few expect a major breakthrough in the deficit battle, seeing economic growth, not tax rises or spending cuts, doing the most to reduce the shortfall.

"Expectations are modest this time so, even if there are some positive triggers, markets will take off," said IL&FS Investsmart India's Ravi Malani.

Soon after winning power in May, Prime Minister Manmohan Singh pledged to boost healthcare, education and infrastructure spending to help India's millions of poor, who have missed the benefits of a booming economy that grew 8.2 per cent in the year to the January-March quarter.

DEFICIT REDUCTION LAW

As part of that pledge, he plans to increase spending on healthcare and education to as much as nine per cent of GDP from a few percentage points, though not necessarily in this Budget.

But, leaning on communist parties to stay in power, Singh also said he would not sell profitable state firms, cutting the Government off from billions of dollars in privatisation income.

However, analysts still expect the Government to raise at least Rs 40 billion ($870 million) from selling stakes in state business, especially in the oil and gas sector.

And the services sector, which accounts for 50 per cent of GDP, is also largely untaxed, offering scope for new levies.

Recent media reports have also tipped increased spending on roads and irrigation, a $5 billion offshore bond issue to fund farm aid, a new type of bond to finance development projects and lower tariffs for capital goods imports.

Some reports are also speculating the Government will replace the capital gains tax with a turnover tax.

In a move to show its commitment to fiscal responsibility, the Government on Monday enacted a law that supposedly forces it to cut the deficit by at least 0.3 percentage points a year -- although, like any law, it can be repealed or superseded.

The combined Union and State fiscal deficit is almost 10 per cent of GDP, one of the highest levels in the world.

The finance ministry's annual report on the economy stressed the need for action on Thursday, saying the deficit could pump up interest rates and posed a critical challenge to maintaining strong growth in one of the world's fastest growing economies.

Singh's government wants growth of between seven and eight per cent during its five-year term. Rapid growth is crucial just to find jobs for the millions of people joining the workforce every year and for any hope of battling poverty in the world's most populous nation after China.