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Indian budget to underline slow pace of reform
February, 24th 2010

India's government presents its first full post-election budget on Friday, with big-bang reform seen as unlikely despite looming constraints to the country's rapid economic growth.

The budget from Finance Minister Pranab Mukherjee is set to disappoint those who hoped the government might use a hefty majority it won last May as a springboard for reforms such as financial sector liberalisation, analysts said.

The ruling Congress party had frequently blamed its Communist partners for thwarting attempts to reduce state control of the economy during its last term, when it led a fragile coalition from 2004 to 2009.

But even though the left-leaning Congress is firmly in control, it will shy away from contentious moves to open up India's still inward-looking economy in the budget for the fiscal year ending in March 2011, analysts say.

Although growth has rebounded - it is seen hitting 7.5 per cent this year and over eight per cent next year - the government is unwilling to chart a reformist course for as long as the global outlook remains uncertain.

More broadly, there also still appears to be a lack of consensus in the ruling party and its coalition partners in favour of deeper reforms in Asia's third-largest economy.

"There is a substantial body of opinion that believes India was saved from the worst ravages of the global slump because its economy is not so integrated with the rest of the world," said economic analyst Paranjoy Guha Thakurta.

India's growth slowed to 6.7 per cent last year from boom levels of nine per cent as a result of the worldwide downturn, but that was seen in thecountry
as a good performance compared to anemic expansion or recession in the West.

Most economists tout liberalisation to pull in foreign investment as the best way to boost growth and ease grinding poverty. More than 40 per cent of India's 1.2 billion people still live on less than US$1.25 a day.

But moves such as opening the vast retail and financial sectors to foreign investors, privatisation and introducing flexible hiring-and-firing laws appear a step too far for the government.

"What happened in the US and Europe has made politicians in India and everywhere more guarded about introducing measures to liberalise the economy," said HSBC senior economist Robert Prior-Wandesforde.

Political commentator Parsa Venkateshwar Rao added: "With the international financial crisis, this is the wrong time for anyone to talk about reform."

India's robust upturn, fuelled by buoyant domestic demand, will give Mukherjee leeway to start rolling back stimulus steps put in place to help shield the economy from the slump, analysts said.

But the government has repeatedly stressed that stimulus exit will not be at the cost of growth.

The 74-year-old Mukherjee, known as one of India's canniest politicians, will seek to satisfy political allies with populist policies while also pacify the debt market by taking the first steps to rein in the ballooning deficit by re-embracing fiscal discipline, analysts said.

Big public spending schemes will be kept, including hikes to a flagship rural sector jobs scheme, along with heavy investment in infrastructure and education - seen as cornerstones of development.

Most of the avenues for fiscal consolidation are expected to be through bigger tax collection due to faster growth, a widening of the service tax net, divestment of stakes in state-run enterprises and the sale of spectrum for third-generation telephony.

Analysts are betting the budget deficit will fall to 5.5-5.9 per cent of gross domestic product from its current 6.8 per cent, a 16-year high.

Still, if the government fails to take any bold steps now, some say a window of opportunity might shut. This year is the only one in which there are no major state elections to preoccupy the Congress party.

"If they don't do it now, they won't do it (at all) - elections will start coming into the picture and voter considerations will take over," said D K Joshi, principal economist at Crisil Ratings.

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