India gets serious about growth -
Indian Budget May Cut Taxes to Spur Growth, Catch Up With China
By Cherian Thomas
New Delhi, Feb. 27 (Bloomberg) -- As an army officer, Jaswant Singh saw Indian soldiers, wearing gym shoes and armed with vintage rifles, defeated by better-equipped Chinese troops in 1962.
Four decades later, preparing his first national budget as finance minister, Singh is confronting his northern neighbor again. China's economy grew at almost twice the pace of India's and got a dozen times more foreign investment last year. Singh, who presents the budget on Friday, is laying plans to catch up.
``People have so long ignored India because perceptions are rooted in the past,'' said Michael Spencer, chief economist for Asia at Deutsche Bank AG. ``We would expect the finance minister to reform the tax structure, spend more on infrastructure, renew moves on privatization and ease restrictions on investments.''
India's economy is forecast to grow 4.4 percent in the fiscal year to March 31, a third short of the government's earlier target, as agriculture contracts because of drought. In contrast, China expanded at 8 percent last year and attracted $52.7 billion in foreign investment, exceeding flows to the U.S. India got $4.4 billion.
This year's budget may be Singh's opportunity to put India on the road to becoming by 2010 Asia's third trillion-dollar economy, after Japan and China, according to Chetan Ahya, an economist at Morgan Stanley in Mumbai.
By reducing import tariffs twice as high as China's, and attacking the vestiges of socialist-style controls which exist 12 years after India started opening up its economy -- in the form of restrictions on foreign investment in telecommunications and state- run banks -- Singh may signal India's seriousness in competing with China.
``You need to match China's growth rates if you need the attention of the world,'' said Saumitra Chaudhuri, chief economist at rating agency ICRA Ltd. in New Delhi.
2004 Elections
Indian planners say the economy has to expand an average 8 percent annually to improve the lot of 400 million Indians who live on less than $1 a day.
Singh, whose Bharatiya Janata Party faces elections in nine states this year and parliamentary polls in 2004, will probably cut personal and company tax rates and boost spending on irrigation and highways, analysts said.
A finance ministry panel suggested in December that tax on Indian companies should be cut to 30 percent from 36.75 percent by 2006, and foreign companies should be taxed at 35 percent, from 36.75 percent. Overseas companies doing business in China pay about 15 percent of their income in taxes.
Yesterday's railway budget, presented yesterday, suggests the government won't push through unpopular measures. Passenger fares were left unchanged, while companies will pay more to transport freight.
Stimulate Demand
The government is hoping lower taxes and higher spending will prompt people to buy goods such as Hero Honda Ltd. motorbikes and S Kumars Nationwide Ltd.'s clothes, especially in rural areas where three-fifths of the nation's 1 billion people.
Singh knows ``more money spent on infrastructure has a multiplier effect on the economy through jobs, income and demand,'' said Ravi Uppal, managing director of Asea Brown Boveri Ltd. (India), a unit of Europe's largest electrical-equipment company.
Hero Honda Ltd., India's biggest motorcycle maker, said this month it won't meet its sales target of 1.8 million motorcycles in the year. Hindustan Lever Ltd., India's biggest consumer goods company, said sales fell 2.3 percent in the three months ended Dec. 31, the fourth straight quarterly drop.
Singh may have limited room to boost spending, given the budget deficit may have widened to 6.3 percent of gross domestic product from a target of 5.3 percent. That's partly because asset sales were a third of the target and tax revenue is growing at 16 percent, short of the 23 percent goal.
Investment Limits
India may loosen foreign investment limits in areas such as telecommunications to 74 percent of a company's capital from 49 percent and in petroleum refining to 100 percent from 26 percent, analysts said. It may also raise taxes on software exports and other services, which make up half the economy. Last year, for the first time, the government imposed a 36.75 percent tax on 10 percent of exports by software companies.
India spends 7 percent of its budget on food and fertilizer subsidies. About 14 percent of spending goes to defense and 26 percent to pay interest on national debt. That leaves little for other needs, such as schools, hospitals and power plants.
``To revive growth, India will have to fix the deficit which is crowding out public and private investment,'' said Sudipto Mundle, chief economist for India at the Asian Development Bank. ``A large part of what India spends are committed expenses --there is limited room to cut.''
Last month, Standard & Poor's said it maintained the negative outlook and junk rating it assigned India in September because of the government's chronic deficit.
With polls looming, Singh will be under pressure from his party to hold back on cutting expenses, such as fuel subsidies, for fear of alienating voters. With the government committed to lowering import tariffs, Singh's response, analysts said, may be to look for ways to boost revenue collection. |
