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Budget targets farms, social spending

Budget targets farms, social spending
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First Published: Mon, Feb 28 2011. 03 23 PM IST
Updated: Mon, Feb 28 2011. 03 23 PM IST
New Delhi: The government boosted next year’s farm and social spending, counting on brisk economic growth to help pay the cost of appeasing voters angered by corruption scandals and stubbornly high inflation.
Economists greeted next year’s budget unveiled on Monday with scepticism, saying both New Delhi’s budget deficit and economic growth forecasts looked optimistic, especially given high global oil prices that may inflate its subsidy Bill.
Also Read | FM’s Budget Speech (Full Text)
Budget 2011 (Highlights)
Prime Minister Manmohan Singh’s Congress party faces elections in five states this year amid criticism over inflation and its handling of several high-level corruption scandals and, as expected, the 2011/2012 budget was heavy on spending and light on economic reforms.
One of the budget’s centrepieces is a Food Security Bill to provide cheap grains for millions of India’s poor, promising some relief to those hit the hardest by high food and energy costs, but sparking worries about its huge cost.
In his budget speech, finance minister Pranab Mukherjee said social spending would rise by 17% in 2011-12. That includes health spending, which would rise 20% in the fiscal year starting 1 April.
The government expects Asia’s third-largest economy to grow by nearly 9% in the next fiscal year, generating enough tax revenue to narrow the fiscal deficit to 4.6% of GDP from 5.1% this year.
Consequently the government surprised markets announcing the gross market borrowing plan for the next fiscal year at Rs4.17 trillion, below the Rs4.5 trillion forecast in a Reuters poll.
Unrealistic scenarios
“Both the borrowing and fiscal deficit numbers have been worked out taking into account the most optimistic macro-economic scenarios, which in all likelihood is not going to be the real situation.” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
Economy grew a slower-than-expected 8.2% in the October to December quarter from a year earlier, government data on Monday showed, though Mukherjee said it was still on track to expand 8.6% in the whole of 2010/2011 year.
In an apparent effort to sustain buoyant growth, the government unexpectedly retained some of the tax cuts put in place to help India manage the global economic downturn.
Among the reforms that failed to make it into the Budget Bill was a provision allowing foreign investment in the modern supermarket sector that investors say India needs to boost productivity and keep its growth running well ahead of inflation, which tops 8%.
Mukherjee also announced incentives for private investment in infrastructure and steps to raise agricultural productivity.
The minister raised the foreign investment limit in corporate infrastructure bonds by $20 billion, and announced the creation of infrastructure debt funds.
In a pilot move, the minister said some subsidies for food and fuel would be directly given as cash to customers starting in March, a move aimed at cutting waste.
Mukherjee defended the government’s reform credentials.
“At times the biggest reforms are not the ones that make headlines, but the ones concerned with details of governance which affect the everyday life of the common man,” Mukherjee told parliament.
“The budget is more agriculture and rural focused, probably with an eye on the state elections,” said Ambareesh Baliga, vice-president, Karvy Stock Broking in Mumbai.
India’s most-traded 8.13%, 2022 bond yield rose 2 basis points to 8.11% on news of increased social spending before falling to 8.05% after the fiscal deficit and borrowing targets were announced.
Focus on farm sector
As expected, the government forecast proceeds of about Rs40,000 crore from stake sales in state companies in the new fiscal year, when it will not be able to count on windfall gains it enjoyed this year from the sale of 3G telecom licences to plug budget holes.
Eliminating supply bottlenecks in the food sector will be in focus in 2011-12, Mukherjee said, adding that cold storage chains would be given infrastructure status, which makes them eligible for preferential borrowing rates to build facilities.
As much as 40% of India’s fruit and vegetable production is wasted because of poor networks and a lack of cold storage facilities, with much product still sold on flat-bottomed carts by smallholders even in the centre of cities like Delhi.
The moves to bolster infrastructure development were expected, although implementation of such initiatives has tended to lag targets. Inadequate power, roads and other infrastructure act as bottlenecks to growth and push up costs.
The Budget will also increase the duty on iron ore exports by fourfold to 20%, a move that will keep prices down for domestic steel producers but could push up global iron ore prices.
Budget will also give a 3% interest subsidy to farmers in 2011/12, up from 2% previously, and raises the target for loans to the farm sector to Rs4.75 trillion ($105 billion) from Rs3.75 trillion previously.
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First Published: Mon, Feb 28 2011. 03 23 PM IST