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India’s Lower House Approves Mukherjee’s Budget Plan PDF Print
Written by Unni Krishnan   
Friday, 30 April 2010 04:41
The budget is out of the way but don’t expect any big reforms going forward
Source: Bloomberg

India’s lower house of Parliament approved Finance Minister Pranab Mukherjee’s plan to raise taxes on fuel and manufactured products, enabling the biggest budget- deficit cut in 19 years.
The ratification of the budget, unveiled on Feb. 26, came two days after Prime Minister Manmohan Singh’s government defeated motions sponsored by the opposition that sought to roll back the tax increases, which they said would add to inflation. Mukherjee today cut tax rates on some products including drugs.
To gain a majority in parliament, Singh has had to rely on regional parties like the Bahujan Samaj, led by Mayawati, who as chief minister of the Uttar Pradesh state in 2007 ordered the closure of retail operations of companies including Reliance Industries Ltd., India’s biggest company by market value. The dependence on smaller parties restricts Singh’s ability to open the Indian economy further to foreign retailers and insurers.
“The budget is out of the way but don’t expect any big reforms going forward,” said Laveesh Bhandari, director at Indicus Analytics Pvt., a research group in New Delhi. “The government lacks political strength in parliament.”
The benchmark Sensitive Index rose 0.7 percent to 17,503.47 at the close of trading on the Bombay Stock Exchange today, while the yield on the 10-year government bond was little changed at 8.09 percent.
Tax Changes
While replying to the budget debate today, Mukherjee increased a levy on raw cotton exports and granted relief to some businesses. He cut the excise duty on hand-rolled local cigarettes, lowered the customs duty on 11 drugs and exempted a service tax on houses for the poor.
The house also approved the increase in excise tax on almost all products to 10 percent from 8 percent and a one rupee per liter levy on gasoline and diesel. Besides higher taxes, the minister plans to raise 350 billion rupees ($8 billion) by selling frequency licenses to mobile-phone operators and 400 billion rupees from the sale of stakes in state-run firms.
The government will sell 10 percent of state-run Engineers India Ltd., which designs oil refineries and chemical plants, according to a separate statement by the finance ministry today.
Opposition Protest
The main opposition Bharatiya Janata Party didn’t participate in the budget vote and walked out of parliament in protest against the proposals, saying they are anti-people.
The political situation complicates Singh’s plans to raise the foreign direct investment limit in insurance companies to 49 percent from 26 percent and allow overseas retailers such as Wal-Mart Stores Inc. to operate in the country to boost investments and economic growth.
India permits overseas retail chains to operate as wholesalers and sell goods to businesses such as supermarkets, department stores and restaurants. They are barred from opening stores or buying stakes in supermarket chains.
Mukherjee’s budget aims to withdraw the fiscal stimulus as growth accelerates, stoking inflation. India’s $1.2 trillion economy may grow 8.5 percent in the year ending March 31, the fastest pace in three years, according to the minister. The benchmark wholesale-price inflation rate rose to 9.9 percent in March.
Fuel Prices
Higher fuel levies in the budget prompted the country’s biggest refiners including Indian Oil Corp. and Bharat Petroleum Corp. to raise prices. Mukherjee said the economy has the capacity to withstand the changes.
As prices rose, the Reserve Bank of India on April 20 raised its benchmark interest rates and the cash reserve ratio by a quarter point, and indicated it would continue to tighten monetary policy in a “calibrated” way to damp price pressures without derailing growth.
Even so, the central bank said it faces a “dilemma” in absorbing more cash from the economy through increases in the cash reserve ratio, because it also has to leave enough money in the economy to support the government’s borrowing program.
New bond sales planned by the finance ministry this year are 36.3 percent higher than the previous year, according to the central bank.
Standard and Poor’s raised India’s credit rating outlook to “stable” from “negative” on March 18 on Mukherjee’s plan to cut the budget deficit to 5.5 percent of gross domestic product in the year to March 31 from 6.9 percent of GDP in the previous year.
--Editors: Cherian Thomas, Stephanie Phang
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