India Raises Spending, Taxes the Rich

                          India's finance minister Thursday tried to balance political compulsions with repeated promises of financial discipline, saying he will raise spending but that he will stick to a fiscal roadmap and increase taxes for the rich.

The 16.6 trillion rupee ($307 billion) budget for the fiscal year starting April 1 aims to increase spending by 16%, underscoring the pressure on the government to continue to spend on development plans in the education, health and other social sectors, with an eye on improving its prospects at state elections this year and federal polls in 2014.

P. Chidambaram, while presenting the federal budget in parliament, projected that the country's fiscal deficit will be 4.8% of gross domestic product in the next fiscal year starting April 1, narrower than this year's 5.2% deficit, which betters its own previous projection of 5.3%.

The government hopes to reduce the deficit to 3% by March 2017.

New Delhi is banking on revenue from higher taxes on the rich and corporates and from stake sales in state-run companies and the auction of

telecom bandwidth to help fund the higher spending.

It is also hoping that a factory gate tax on expensive sports utility vehicles sold to private individuals would help boost revenue. It increased the excise duty on SUVs to 30% from 27% and import duty on high-end cars to 100% from 75%. It also imposed a transaction tax on non-farm commodities.

Also Thursday, government data showed that the economy slowed more than expected in the October-December quarter, reflecting concerns that the country's economic troubles are unlikely to abate in a hurry.

Gross domestic product grew 4.5% from a year earlier, sharply lower than the 5.3% expansion reported in the preceding quarter. The reading was below the 4.8% median estimate in a Dow Jones Newswires poll of 13 economists.

While analysts welcomed the federal budget's commitment to fiscal targets, not all were convinced. It is one thing to lay out a fiscal consolidation plan, and quite another to be able to implement it, said Taimur Baig, a Deutsche Bank DBK.XE +0.13%economist.

Economists say the pressure on the government to dole out populist incentives is only expected to grow as the federal elections approach.

"With a general election not much than a year away, political pressure from within the Congress Party [which leads the ruling federal alliance] may well have had an influence on the make-up of the finance minister's budget," said Robert Prior-Wandesforde, an economist at Credit Suisse CSGN.VX -0.59% .

Several states are scheduled to go to the polls this year while the government is also required to hold federal polls latest by May 2014, making this possibly the last budget announcement by the current government.Since taking office in September, Mr. Chidambaram has fast-tracked the government's reforms in an effort to boost economic growth back to about 8%, which observers say is necessary to create jobs in a country where 13 million people reach working age every year.

However, the government's weak financial position has constrained its efforts.

Ratings agencies have warned that India's sovereign rating could be relegated to non-investment grade, or junk, status if it fails to reduce wasteful subsidies and bring its fiscal deficit under control.

The budget raises spending on health to 373.3 billion rupees next fiscal year while that on education has been increased by 17% to 658.7 billion rupees.

To boost revenue, the budget imposed a 10% surcharge, or a tax levied on tax, on those with earnings of more than 10 million rupees ($187,000) a year. Besides, it also doubled the surcharge imposed on local companies to 10% while raising it to 5% from 2% for foreign companies.

Mr. Chidambaram estimated that the additional surcharge, and other direct tax initiatives -- such as a withholding tax of 20% on profits distributed by unlisted companies to shareholders through a buyback of shares -- will help the government raise a total of 133 billion rupees ($2.5 billion).

The budget sought to calm the concerns of the common man struggling with high inflation by offering a marginal tax benefit which the minister said would help 18 million taxpayers. Mr. Chidambaram also relaxed conditions for investing in stock markets through a program that provides tax benefits to retail investors.

The budget also gave some incentives to manufacturers for buying plant and machinery, a move aimed at spurring capital investments and reviving industrial activity.

The Associated Chambers of Commerce and Industry, an industry lobby group, lauded the budget for encouraging investments in manufacturing and infrastructure development while presenting a credible fiscal consolidation plan.

The group said that the fiscal plan will help avert the risk of a ratings downgrade.

The budget, however, failed to provide clarity on the retrospective tax on overseas transactions involving Indian assets, a contentious proposal introduced last year that had concerned foreign investors, leading to a rethink by the government.