MUMBAI: The government may spend as much as 60% more on ports, power plants and roads in its next budget, allowing companies to cut costs and help dampen the fastest inflation in two years.
Finance Minister Palaniappan Chidambaram will also probably cut import tariffs to make products cheaper in the budget for the year starting 1April. Chidambaram presented his first budget in 1996, when India’s economy was half its current $854 billion (Rs37,726 crore).
Prime Minister Manmohan Singh, facing political pressure over rising prices that are eroding the spending power of India’s poor, last week asked state chief ministers for their help to curb inflation. Improved infrastructure may encourage more companies to follow in the footsteps of Nissan Motor Co. and Renault SA, which are investing in factories in the world’s second-fastest growing major economy.
“If the government gets it right on inflation, the country can look forward to sustained high growth,” said Robert Prior Wandesforde, an economist at HSBC Holdings Plc in Singapore. “Removing infrastructure bottlenecks should improve the productive potential of the economy, so that it can sustain demand growth without running into inflationary difficulties.”
India’s benchmark inflation rate climbed to 6.73% this month as record economic 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 Steel Authority of India 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. Chidambaram may also prune tax exemptions on home loans to slow mortgages.
India, Asia’s fourth-biggest economy, may grow 9.3% in the quarter ended 31December from 9.2% in the previous quarter, according to a Bloomberg News survey. The government expects a record 9.2% expansion in the year to 31March, the fastest pace after China among the world’s major economies.
“Inflation control is on top of the agenda of the government,” said Venugopal Dhoot, president of India’s Associated Chambers of Commerce and Industry, or Assocham. “The government will cut customs duty further to check inflation and to meet its commitment to cut the tariff to Asean levels.”
Consumer affordability has increased demand for food products such as wheat, sugar and cooking oil. India, the world’s second-biggest wheat grower, last year became an importer of the grain for the first time in seven years. It also banned export of wheat and pulses to augment supplies.
Chidambaram on 22 January unexpectedly cut import duties on a range of products from steel to sulphur to palm oil. Five out of six traders and importers surveyed by Bloomberg News on 22 February expects India, the world’s second- biggest buyer of vegetable oil, to further cut duty on palm oil.
Since 2001, the government has more than halved the maximum customs rate for manufactured goods to 12.5%, to align the levy with the Association of Southeast Asian Nations such as Singapore where the tariff ranges between 0% and 5%. Assocham’s Dhoot expects India’s peak customs rate to be cut to 10%.
Prime Minister Singh’s Congress party faces seven state elections this year, the most important being in April in the northern province of Uttar Pradesh, which sends a seventh of all lawmakers to parliament. The election outcome in Uttar Pradesh will set the tone for the next general elections in two years.
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.
“The government has enough money this year to meet its budget deficit target and allocate more for infrastructure,” said Saumitra Chaudhuri, chief economist at rating company ICRA Ltd. “Tax revenue has been buoyant because of rapid growth.”
Chidambaram had planned to narrow the budget deficit to 3.8% of gross domestic product in the year ending 31 March from 4.1% of GDP in the previous year, after providing 8% of the Rs5.63 trillion budget on food and fertilizer subsidies, 13% on defense, 21% on interest payments and another 29% to states’ exchequer.
Tax collections have risen 38% in the nine months ended 31 December compared with a target of 15%. India, which spends a seventh of China’s $150 billion investment in public works each year, wants to team up with non-state and foreign companies to invest as much as $65 billion in infrastructure each year until 2012.
Improving government finances prompted Standard & Poor’s last month to raise India’s debt rating to investment grade for the first time in 14 years. Moody’s Investors Service raised its rating to investment grade in January 2004.
S&P said another rating upgrade would depend on further reductions in the budget deficit. India is bound by a law to cut the budget deficit by 0.3% of GDP each year, and to eliminate its revenue deficit by 2009, borrowing only to fund investments thereafter.
JP Morgan Chase & Co. economist Rajeev Malik expects Chidambaram to maintain existing corporate and personal income tax rates and get rid of the 10% corporate surcharge. Domestic companies pay a 30% tax rate, and an additional levy of 10% on it to fund the government’s education and other programs. Foreign companies in India pay a tax of 40% and a 2.5% surcharge on it.
“A critical feature of future fiscal reforms will be the pace at which the government eliminates tax exemptions in the form of subsidies and concessions,” said Malik. Tax exemptions to companies and individuals in the year ended 31 March 2005, cost the government Rs1.58 trillion, equivalent to 52% of the total tax revenue collected that year, Malik said.