July 10, 2014 12:11 pm

India vows to revive growth to 8% within three years

Cyclists and traffic pass in front of residential buildings in the Chembur area of Mumbai, India, on Sunday, Aug 4, 2013. India's purchasing managers index (PMI) for services figures July are scheduled for release on Aug. 5. Photographer: Dhiraj Singh/Bloomberg©Bloomberg

India’s recently elected government has vowed to revive economic growth to 7-8 per cent within the next three years and sharply curb its fiscal deficit in a promise to spur job growth and improve living standards for the country’s 1.2bn citizens.

Prime Minister Narendra Modi’s government said it plans to raise foreign investment limits in defence and insurance, overhaul its $43bn subsidy regime, and simplify its archaic tax system to make it more transparent and bolster revenue growth.

Indian Central Government balance

That, the government expects, will help raise growth from last year’s level of about 4.6 per cent.

Revealing the administration’s maiden budget on Thursday, Arun Jaitley, the finance minister, did not announce any big-bang structural reforms, or suggest dramatic policy shifts from the previous Congress government, instead offering a cautious agenda that some analysts described as mere “tinkering”.

“It is a stable budget, it has not rocked too many boats,” said Ajit Gulabchand, head of Hindustan Construction, the Mumbai-based construction company.

Jahangir Aziz, chief Asia economist at JPMorgan, said: “It wasn’t a visionary statement, it was much more workmanlike.

“I don’t think the government was ready to come with anything bold or anything seminal in just six weeks’ time.”

The market reaction was mixed, initially falling more than 1 per cent, before recovering to close down 0.3 per cent at 25,372.75.

Mr Jaitley expressed a strong commitment to fiscal consolidation, but many Indian executives were disappointed at the lack of detail on how the ambitious goals would be reached, including how a subsidy bill, now accounting for 2.3 per cent of GDP, would be pared.

However, the finance minister said the budget, presented by an administration in power for just six weeks, was just a first step in a multiyear programme to unlock India’s long-term growth potential.

“This is only the beginning of a journey that will lead to sustained growth of 7 or 8 per cent or above in the next three years,” from around the current 4 per cent pace, he told parliament.

Mr Modi’s administration will retain the previous Congress government’s ambitious 4.1 per cent fiscal deficit target for this year, despite pressure on state coffers from sluggish tax revenue, rising oil prices linked to turmoil in Iraq and concerns about a poor monsoon.

But he set a fiscal deficit target of 3.6 per cent of GDP for the next financial year, which starts in April, and 3 per cent the subsequent year.

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Visitors walk outside at the opening of the Winter session of Parliament in New Delhi on December 5, 2013. Parliament adjourned for the day after both houses condoled the death of two sitting members, 27 people in a building collapse in Mazgaon area of Mumbai in September, those who lost their lives in Phailin and Helen cyclones in India and the deaths in super typhoon Haiyan in the Philippines. AFP PHOTO/RAVEENDRAN (Photo credit should read RAVEENDRAN/AFP/Getty Images)

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To help plug this year’s fiscal hole, New Delhi will raise excise duties on cigarettes, cigars, traditional Indian paan and other tobacco products from as low as 11 per cent to up to 72 per cent.

Excise duties on soft drinks are also being raised by 5 per cent, bad news for US-based soft drinks producers Coca-Cola and Pepsi, which both have ambitious plans to invest and expand in India.

In the longer-term, Mr Jaitley said he would set up an expenditure management commission to examine state spending, and propose how subsidies could be overhauled to ensure better targeting of benefits.

In a bid to attract new capital, New Delhi will raise the foreign ownership cap on defence industries, and on insurance to 49 per cent, from the previous cap of 26 per cent.

Mr Jaitley offered no possible resolution to New Delhi’s bruising and self-damaging battle with Vodafone, which is being chased for a “capital gains tax” for its purchase of an Indian mobile phone network, under a law passed in 2012, years after the acquisition was made.

However, the finance minister tried to reassure foreign companies, highly skittish about India as a result of the Vodafone case and others like it, that the BJP administration will set up a high-level committee to carefully scrutinise any new retrospective taxation cases before launching them, though he affirmed India’s “sovereign right” to adopt retrospective legislation.

“We are committed to provide a stable and predictable tax regime which will be investor friendly and spur growth,” Mr Jaitley said.

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