SRINAGAR: Prime Minister Narendra Modi’s new government’s first budget that promises to revive growth and curb borrowing, but left open questions on how it will reduce the fiscal deficit and restore investor confidence, was presented on Thursday in Indian parliament amidst huge media glare.
Finance Minister Arun Jaitley stopped short of halting retroactive tax claims against foreign investors. Britain’s Vodafone vowed in response to continue its fight against a years-old $2.2 (an estimated Rs 12000 Cr) billion charge.
“We shall leave no stone unturned in creating a vibrant and strong India,” Jaitley said, vowing to raise the pace of economic growth to 7-8 percent in three to four years from less than 5 percent now.
Jaitley, 61, told lawmakers he would uphold the fiscal deficit target for this year inherited from the last government – 4.1 percent of gross domestic product – but admitted that this would be a challenge.
“The intent appears to be there, but the measures have not been really thought through,” Atsi Sheth, Moody’s sovereign credit analyst for India, told Reuters.
Jaitley announced an 8 percent rise in spending, roughly unchanged after taking inflation into account. The government will also seek to raise a record $10.5 billion (Roughly Rs. 60000 Crore) from asset sales – four times what the previous government collected from privatisation moves in the fiscal year ended in March 2014.
Among the asset sales would be some holdings in state-run banks, Jaitley said, but he added the government would continue to hold majority ownership of the lenders.
In his two-and-a-quarter hour address, Jaitley raised the minimum income level at which people start paying tax and hiked levies on cigarettes and soft drinks.
Privatization?
Jaitley announced he would raise ceilings on foreign investment in the defence and insurance sectors and loosen rules for foreign e-commerce retailers and real estate investors, but still bar non-residents from taking majority control in projects to supply the world’s largest arms buyer.
Limits on foreign investment in defense and insurance ventures will go up to 49 percent from 26 percent – less than sought by defense contractors to justify sharing technology when they locate operations in India.
In another signature initiative, the government will launch a sales tax reform this year to unify states into a common market, a measure that would boost revenue while making it easier to do business.
Investors had piled into Indian stocks on hopes that Modi’s leadership and mandate would break a logjam thwarting a host of reforms during the 10-year tenure of his predecessor, Manmohan Singh, whose coalition government became increasingly divided.
However, the concrete measures announced by Jaitley fell short of bullish expectations and Indian stocks, bonds and the currency gave back gains late in the day as doubts about the budget arithmetic emerged.
Andrew Colquhoun, head of the Asia-Pacific Sovereigns Group at Fitch Ratings, said he was “currently unsure how this (fiscal deficit) can be met without further revenue-strengthening or expenditure-saving measures”. Both Moody’s and Fitch rate India in the bottom rung of investment grade.
‘BITTER MEDICINE’
Modi, 63, won election in May with a pledge to create jobs for the 1 million people who enter India’s workforce every month. Since taking office, he has warned that Indians should expect “bitter medicine”.
Reflecting that change in tone, Jaitley vowed to adhere to this year’s “daunting” 4.1 percent budget deficit set by the previous government and cut it to 3.6 percent of GDP in each of the two following years.
He managed to find room in the budget to fund projects to upgrade India’s food distribution infrastructure. He raised subsidies on fertilisers and, against expectations of a cut, extended diesel subsidies – key measures to aid farmers who face poor monsoon rains this year.
The minister said he would set up a high-level committee to review retrospective tax claims blamed for choking foreign investment after firms led by Vodafone were hit with massive demands.
Jaitley sought to reassure investors by promising a stable tax regime and saying the government would not “ordinarily” create new liabilities retrospectively, but stopped short of moving to scrap the law. Several cases in the court will be concluded through the legal process, he said.
The British firm said it will “continue the process of international arbitration”.
Vodafone and India have been locked in a standoff since the company acquired Hutchison Whampoa’s Indian mobile assets in 2007.
The Supreme Court dismissed the demand in 2012, but the government at the time responded by announcing retrospective legislation to change the rules.
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