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India Budget May Roll Back Tax Breaks
February, 20th 2010

India's budget for the coming fiscal year will likely roll back tax breaks and curb spending growth, marking an effort by New Delhi to rein in a deficit that widened sharply on costly fiscal measures to stoke an economic recovery during the global financial crisis.

With the economy gaining steam, the government will count on higher tax revenue and proceeds from state asset sales to lower the deficit to 5.5% of gross domestic product in the fiscal year starting April 1 from 6.8% in the current year.

Finance Minister Pranab Mukherjee, who will unveil the budget next Friday, will likely signal an intent to re-embrace fiscal discipline, which the government abandoned two years ago to help India through the deepest global downturn in decades.

The budget will ensure, however, there is sufficient stimulus to sustain the recovery. And the government is likely to continue leaning heavily on the bond market for funding, with gross market borrowing set to be on par with this year's record 4.51 trillion rupees ($97 billion).

"Exit measures should be calibrated in a manner that stimulus in the economy should continue. At the same time, some adjustments will be made to bring down the fiscal deficit," said C. Rangarajan, chairman of Prime Minister's Economic Advisory Council.

Higher cash inflows will give New Delhi plenty of room to spend heavily on education, healthcare and job creation in India's vast agricultural sector, which employs 60% of the country's more-than-a-billion population. A 15%-20% increase in such spending is likely, said HSBC economist Robert Prior-Wandesforde, a slower pace than this year's 33% rise.

The pickup in economic growth - GDP is set to expand more than 8% next fiscal year compared with 7.2% this year - will give the government more leeway to remove some accommodative steps it took to bolster business activity and consumer spending.

The government is likely to lift taxes levied at factory gates by two percentage points, taking back some of the reduction of four to eight percentage points during 2008-2009. It is also likely to increase the services tax back to 12% from 10%, reversing a temporary cut.

Such steps, while cautious, will boost revenue. A stronger economy will also shore up the public coffers.

Manoranjan Sharma, economist at Canara Bank, said direct tax revenue in excess of four trillion rupees next fiscal year is likely, up from 3.7 trillion rupees that Central Board of Direct Taxes Chairman S.S.N. Moorthy expects this year.

Mr. Mukherjee may also set a time frame for a uniform goods and services tax aimed at replacing a host of charges such as an import tax and value-added tax.

Prime Minister Manmohan Singh's government seeks to cut its stakes in 68 firms, including Steel Authority of India and Coal India.

Such sales could net up to 400 billion rupees next fiscal year, said Edelweiss Securities economist Siddhartha Sanyal. A proposed auction of third generation mobile telephone bandwidth, if pushed to next fiscal year, could fetch 250 billion rupees.

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