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FM slashes tariffs to curb inflation, raises spending as growth slows

FM slashes tariffs to curb inflation, raises spending as growth slows
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First Published: Wed, Feb 28 2007. 06 14 PM IST
Updated: Wed, Feb 28 2007. 06 14 PM IST
New Delhi: The Indian government slashed import tariffs to curb inflation and increased spending on ports, roads and farms to sustain economic growth that slowed last quarter.
Finance Minister Palaniappan Chidambaram reduced duties on coking coal, cooking oils and other imports in today’s budget in New Delhi. Growth in Asia’s fourth-largest economy unexpectedly eased to 8.6% in the three months ended December. 31 as farm output increased at the weakest pace in two years, the government said in a separate report today.
Rising prices of rice and wheat prompted Indian voters to oust Prime Minister Manmohan Singh’s ruling Congress party in two state elections this month. Chidambaram told parliament the government is targeting 10 percent annual growth in Asia’s fourth-largest economy within the next five years.
“Political pressure on the government has risen because of inflation,” said Keith Gyles, international economist at Capital Economics Ltd. in London. “The government is doing the right thing by trying to fix infrastructure because that is hurting supplies and boosting manufacturing costs.”
Government spending on infrastructure including ports, power generation and roads will be raised by 40% to Rs1.34 trillion ($30.2 billion) in the year starting April 1, Chidambaram told parliament. Better infrastructure may see more companies follow Nissan Motor Co. and Renault SA, which are investing in factories in India.
Stocks Fall
Indian stocks dropped after Chidambaram proposed raising a tax on dividends. The key Sensitive Index fell 285.91, or 2.3% , to 13,192.18 as of 2:00 p.m. local time, and is poised to post its first monthly drop in nine months.
The yield on the benchmark 8.7 % note due January 2017 rose 5 basis points, or 0.05 percentage point, to 7.94 percent as of 1:57 p.m. in Mumbai.
India’s $854-billion economy expanded at the slowest pace in a year last quarter, the Central Statistical Organisation said in a statement today. The government expects 9.2% expansion in the year to March 31, the fastest pace since 1989 and behind only China among the world’s major economies.
“India might grow as fast as China in the not-too-distant future,” said Robert Kalin, who manages about 500 million euros ($661 million) in Indian stocks at DWS Investment GmbH in Frankfurt. “Inflation may stay above the central bank’s comfort zone for much of this year.”
Tax measures disappoint
Making no changes in the personal and corporate income tax rates, the Union Budget for 2007-08 raised the threshold limit of exemption by Rs10,000 giving a relief of Rs1000 to all individuals. The threshold limit for women was raised to Rs1.45 lakh and for senior citizens to Rs1.95 lakh.He further brought down excise duty on petrol and diesel by 2% as an anti- inflationary measure while cigarattes and bidis will cost more.
The dividend distribution tax was raised from 12.5% to 15%.
The peak customs duty for non-agricultural products has been slashed from 12.5% to 10% and duty on paan masala not containing tobacco reduced from 66% to 45%.
The Defence allocation has been increased to Rs.96,000 crore including Rs41,921 crore for capital expenditure, in a budget that pegs the fiscal deficit at Rs1,50,948 crore which is 3.3 per cent of the GDP. The direct tax proposals is estimated to net an additional Rs.3000 crore while the indirect proposals are revenue neutral.
By removing two lakh assessees from the service tax net, the budget will sacrifice Rs800 crore annually
Consumer Prices
The benchmark inflation rate in India climbed to two-year high of 6.73% this month, above the central bank’s tolerance level of 5%, as sustained growth boosts demand for farm and factory products. Gains in consumer prices paid by farmers are at an eight-year high of 8.94%, while price increases for urban dwellers are the most in six years.
The fastest loan growth since 1971 and higher salaries are enabling Indians to buy products from cars to houses, stretching the capacity of Gujarat Ambuja Cements Ltd. and other companies. The central bank, which has raised its key overnight lending rate five times in the past year, has warned areas such as housing are showing signs of overheating.
Higher incomes have increased demand for food products such as wheat, sugar and cooking oil. Singh’s government today banned futures trading in wheat and rice to curb inflation, after earlier halting exports of wheat and pulses to augment supplies.
Farm Production
Slower agricultural growth has also added pressure to the price of staple foods in Asia’s second-most populous nation. Farm output increased 1.5% in the quarter to Dec. 31, the government said today, slowing from 1.7% in the second quarter and 3.4% in the period before that. Manufacturing also cooled, recording an expansion of 10.7%, down from 11.9% in the previous quarter.
“The growth numbers are surprising,” said N. R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. “The main culprit seems to be the sluggish growth in the farm sector. The unequal distribution of rains during the period seems to have impacted the agriculture growth.”
The agricultural sector in India, which accounts for a fifth of the South Asian economy, depends on the four-month monsoon rains ending September each year to water crops as only a third of the nation’s arable land is irrigated.
India’s 234 million agricultural workers may benefit from the government’s farm credit target of Rs 230 crore announced by the Finance Minister.
Import Duties
The Harvard-educated finance minister also reduced import tariffs today for the second time in five weeks. He unexpectedly cut duties on January 22 on a range of products from steel to sulphur to palm oil, a month ahead of the scheduled budget announcement, to rein in prices.
Chidambaram cut the maximum customs rate for manufactured goods to 10% from 12.5%, to align the levy with Association of Southeast Asian Nations such as Singapore, where the tariff ranges between zero and five percent.
The ruling Congress party lost power in Punjab and Uttarakhand on 27 February. Prime Minister Singh wants to curb inflation ahead of polls in April in the more critical state of Uttar Pradesh, which sends a seventh of all lawmakers in parliament. The election outcome in Uttar Pradesh will set the tone for the next general elections due by April 2009.
Infrastructure deficiencies in India are hurting supplies and adding to the cost of companies operating in the $854 billion economy.
Power Plants
Lafarge India Pvt Ltd, the local unit of the world’s largest cement maker, has its own power plant because government supplies are inadequate. Ford Motor Co., which has a factory in southern India, requires its engine supplier in central state of Madhya Pradesh to install global positioning system devices in its delivery trucks to locate vehicles stuck in traffic so that it can adjust production schedules.
India produces about 8% less electricity than it needs, cutting gross domestic product by a 10th, the finance ministry estimates. Highways, which move almost 80% of the goods transported in India, account for only about 2% of the country’s roads. It takes an average 85 hours to unload and reload a ship at India’s major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.
“Tax revenue has been buoyant this year because of an acceleration in economic growth,” said N. R. Bhanumurthy, an economist at Institute of Economic Growth in New Delhi. “The government’s finances are improving rapidly and it is finding resources for infrastructure spending.”
Chidambaram said he plans to narrow the budget deficit to 3.3% of gross domestic product in the year ending March 31, 2008 from a targeted 3.8% in the previous year.
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First Published: Wed, Feb 28 2007. 06 14 PM IST
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