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Indian finance minister unveils indirect tax cuts in pre-election budget
February, 26th 2014

The Indian government announced a package of indirect tax cuts on Monday to breathe life into spending and investment, and trumpeted its record of growth and reform over the past decade in an interim budget before an election it looks set to lose.

Amid uproar in parliament as lawmakers shouted him down, Finance Minister P. Chidambaram also said he would contain the fiscal deficit for 2013/14 (April-March) at 4.6 percent of gross domestic product (GDP), below his target of 4.8 percent.

“I can confidently assert that the economy is more stable today than what it was two years ago,” Chidambaram said, while warning that action was needed to revive manufacturing.

Monday’s budget was an interim exercise ahead of the election due by May and MPs will be asked to approve only the period until the new government is formed.
Analysts watching the speech welcomed the progress on the fiscal deficit, including his estimate that it would shrink further to 4.1 percent in 2014/15, which would be the lowest since 2007/08.

But they voiced concern about a lack of details.

“Under the hood concerns - primarily on how these deficit targets were met/will be met next year — remain largely unanswered,” said Radhika Rao, an economist with DBS in Singapore.

Rajnath Singh, the president of the main opposition Bhartiya Janata Party, said Chidambaram’s accounting was not credible, saying the finance minister was pushing subsidy spending onto the next government. Indian markets were largely unmoved by the speech, with the rupee at 61.93/94 against its close of 61.9250/9350 on Friday. The currency hit record lows last year amid concerns about the country’s current account and fiscal deficits. The finance ministry printed two conflicting numbers for projected net borrowing in its budget documents, before clarifying that a typographical error had been made.

To reach his deficit target, Chidambaram this year has squeezed higher dividends from cash-rich state-run companies and has deferred 350 billion rupees of oil subsidies into next year’s accounts. Revised major subsidies for 2013/14 will be 2.56 trillion Indian rupees ($41.2 billion), Chidambaram said.

He also cut 2013/14 spending by some 748 billion rupees, 4.5 percent below the total budgeted for the year. For the coming year, he estimated total spending of 17.63 trillion rupees, up 10.9 percent against revised expenditure for the current year.

The new spending included a 10 percent proposed hike to the defence budget.

Opinion polls predict voters will oust the government led by the Nehru-Gandhi dynasty’s Congress party amid widespread discontent with its mismanagement of the economy, stubbornly high inflation and corruption scandals.

Chidambaram, struggling to deliver his speech above the din of lawmakers angry over a plan to divide a southern state, announced no major changes in tax rates.
However, he unveiled lower duty on vehicles ranging from SUVs to motorbikes, as well as mobile phone handsets, along with small measures to soften student loans and help retired members of the armed forces.

He said factory-gate taxes on small cars, two-wheelers and commercial vehicles would be cut to 8 percent from 12 percent, while excise on SUVs was lowered to 24 percent from 30 percent. Small cars, two-wheel and commercial vehicles would be cut to 8 percent from 12 percent.

“The current economic situation demands some interventions that cannot wait for the regular budget. In particular, the manufacturing sector needs an immediate boost,” Chidambaram said.

Asia’s third-largest economy is facing its worst slowdown in nearly a decade, with shrinking manufacturing, slower jobs growth and high inflation.

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