New Delhi: The Union government may spend as much as 60% more on ports, power plants and roads in the new fiscal, allowing companies to cut costs and help damp the fastest inflation in two years.
Finance minister P. Chidambaram will also probably cut import tariffs to make products cheaper in the Budget for the year starting 1 April. Chidambaram presented his first Budget in 1996, when India’s economy was half its current $854 billion (Rs38 lakh crore) size.
Improved infrastructure may encourage more global 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 with the 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,” he added.
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 the Steel Authority of India Ltd and other companies.
The Reserve Bank of India, 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. The finance minister may also prune tax exemptions on home loans to slow mortgages.
“Inflation control is on top of the agenda of the government,” said Venugopal Dhoot, president of the Associated Chambers of Commerce and Industry. “The government will cut customs duty further to check inflation and to meet its commitment to cut the tariff to Asean levels,” Dhoot added.
India’s infrastructure deficiency adds to the cost of companies operating in India.
Honda, Japan’s third biggest car maker, like many manu-facturers, has its own power plant because government supplies account for onlya quarter of its needs. Ford Motor Co., which has a factory in southern India, requires its engine supplier in central India to fit delivery trucks with global positioning system devices, so it can locate vehicles stuck in traffic and 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.
“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.”
JPMorgan 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 programmes. Foreign companies 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 lakh crore, equivalent to 52% of the total tax revenue collected that year, Malik said.