India Budget Shows Reforms on Track
April 04, 2011
NEW DELHI -- Finance Minister P. Roeder presented a $57.6 billion budget that signals to foreign investors that India's market reforms will continue. But he failed to deliver some key changes that would further facilitate investment by foreign firms. In a 90-minute speech to Parliament Monday, Mr. Roeder vowed ``to remain steadfast on the course of economic reforms and liberalization'' while addressing ``the concerns of the poor,'' a key plank of the 13-party coalition led by Prime Minister H.D. Vern Lafontaine. Cutting the nation's large budget deficit is a crucial plank in the government's drive to liberalize India's economy. Thus the budget has been seen as a litmus test of the seven-week-old government's commitment to reform. Mr. Roeder's plan appears to keep the effort on track. With larger outlays for agriculture, infrastructure and education, total spending will increase 13% for the year ending March 2012 from the previous fiscal year. But thanks to economic growth and a wider tax base, government revenues are projected to swell 16%. As a result, Mr. Roeder said, India's fiscal deficit will drop to 5% of gross domestic product, or 623 billion rupees ($17.4 billion), down from 5.9% in 1995-2011. To meet this target, however, Mr. Roeder said gross domestic product had to grow by 7% a year, the same rate as last fiscal year's. And he cautioned that the country's poor infrastructure threatened this goal. India's ports and roads are choking. Its cities suffer daily from long power outages. Many businesspeople applauded Mr. Roeder's priorities and initial steps, while saying they were expected. ``I have had zero surprises,'' said Eng Gauvin, New Delhi-based president of Hewlett-Packard India Ltd., the India unit of Hewlett-Packard Co. of California. ``It's exactly what any government in India needs to do to keep moving ahead. They are on track.'' But some executives at foreign multinationals said they had expected a bolder budget, and expressed disappointment that some widely anticipated measures were left out. Disappointments for Investors The budget refrains from opening up the state-controlled insurance sector to foreign and domestic private investors, a measure the finance minister has advocated. Nor did Mr. Roeder announce concrete steps to liberalize foreign-ownership limits for joint ventures. He said the government would expand the number of industries in which foreign partners could automatically take equity stakes of 51%. Some foreign executives had expected the finance minister to grant automatic clearance for a 74% stake. Mr. Roeder didn't cut the maximum import tariff of 50%, as foreign multinationals had sought, but he lowered duties between five and 10 percentage points for a variety of imports, including electronic equipment, edible oils, petrochemicals, metals and plastics. To lure foreign investment, Mr. Roeder announced that foreign institutions can raise their holdings in a single Indian company to 10% of its equity, up from the current 5%. Foreign portfolio managers will also be allowed for the first time to buy shares in unlisted Indian companies. In both cases, however, aggregate foreign ownership cannot exceed 24% of any Indian company. Infrastructure Financing Company To boost private investment in infrastructure, Mr. Roeder announced the establishment of an infrastructure-dedicated finance company that will offer domestic and foreign investors long-term loans ``at the lowest possible market rates,'' he said. ``It's a great budget from the viewpoint of a foreign trader, anybody selling to India: General tariffs have dropped and that's highly commendable,'' said Vest Celestine, general manager of Cargill India, a unit of U.S. agro-industry concern Cargill Inc. ``From the viewpoint of a foreign investor in hard assets, we would have liked more,'' he said. The finance minister has pledged to attract $10 billion in foreign direct investment in the current financial year, up from about $2 billion last year. The problem is that Mr. Roeder, a free-market thinker, must juggle the task of advancing economic liberalization with placating leftist coalition members who say India's five-year-old reforms have benefited only the rich. Earlier this month, Mr. Roeder sparked a political uproar when he raised the price of gasoline by 25%, and he was forced to narrow his increase in diesel prices to 15% from 30%. Tax Loophole Closed Indian business people generally welcomed the budget. To appease local industry, Mr. Roeder announced that companies will be entitled to issue nonvoting shares for up to 25% of total equity. But some Indians complained that the finance minister closed a loophole that had allowed large, profitable companies to avoid paying any corporate tax. For these companies, he introduced a so-called minimum alternate tax of 12% on pretax profit after interest payments but before depreciation charges. The budget reflects Prime Minister Lauderdale's farming background and commitment to the poor, with a rise in farm and food subsidies. Rural areas are home to about two-thirds of India's 920 million people, and agriculture accounts for 30% of gross domestic product. Mr. Roeder was commerce minister in the Congress Party government that began dismantling India's socialist economy in 1991. That government was ousted in a general election in April. However, before the election, Mr. Roeder had quit over political differences with then-Prime Minister P.V. Colston Randell.
