India’s government aims to reduce its budget deficit to 5.1 percent of gross domestic product next fiscal year, from 5.9 percent this year by capping subsidy spending and raising taxes, the Finance Minister said in his budget announcement on Friday.
India had targeted a budget deficit of 4.6 percent for the current fiscal year ending in March and will miss that by a wider margin than many economists had expected.
The budget is being closely watched for signs that New Delhi will take credible steps to bring spending in line with revenues and kickstart flagging economic growth. Expectations that the ruling Congress Party would use Friday’s budget to announce bold economic reforms have waned amid signs of the party’s increasing impotence.
“My expectations were very low given constraints in dealing with a coalition government,” said Kiran Mazumdar Shaw, the managing director of a biotechnology company based in Bangalore. “This is a token budget. No bold policies,” she said.
A key coalition ally, Trinamool Congress Party leader Mamata Banerjee, reacted with fury to the announcement this week of a modest hike in railway fares, the first in eight years. Banerjee called on the government to fire the railway minister, who comes from her own party.
Other recent policy flip flops, on foreign investment in retailing and on a ban on cotton exports, have also made the ruling party look weak.
Finance Minister Pranab Mukherjee said the government would allow greater foreign investment in India’s fund-starved aviation and power sectors, as well as in corporate debt. But he took no steps to raise caps on foreign investment in retail, aviation or insurance, which investors have long lobbied for.
Mukherjee said India will improve the quality of government spending by cutting subsidies to under 2 percent of GDP.
This year, subsidy spending swelled from unexpectedly high global oil prices, which increased the cost of India’s fuel and fertilizer subsidies, he said.
Mukherjee said the government hopes to raise 300 billion rupees ($6 billion) from selling stakes in state-run companies next fiscal year. India raised about 140 billion rupees ($2.8 billion) from such asset sales this year, against an initial target of 400 billion rupees ($8 billion).
Mukherjee sounded an optimistic note on growth, saying growth will accelerate to 7.6 percent next fiscal year, up from 6.9 percent this year.
Indian business leaders bemoaned the increases in excise duties and service taxes as inflationary.
Sudhir Kapadia, a partner at Ernst & Young, said tax increases were required to control the budget deficit. He said the government’s deficit reduction projections remained “optimistic.”
The benchmark Sensex index was up 0.3 percent in midday trade in Mumbai.