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Indian budget tries to rope in runaway deficit

NEW DELHI: India raised defence spending on Tuesday by 28.2 percent for the year starting April 1, the biggest-ever increase for the world's fourth-largest military.

Finance Minister Yashwant Sinha allocated Rs 585.87 billion ($13.62 billion) in the budget for 2000/2001 (April-March), up from last year's Rs 456.94 billion.

"This represents the largest-ever increase in defence budget in a single year," Sinha said in his budget speech to the lower house of parliament

Food subsidies also rose, but notice was served that other subsidies would be cut while protecting the hundreds of millions of Indians living in poverty.

Sinha delivered budget proposals aimed at curbing a burgeoning fiscal deficit, while keeping investors confident in India's booming markets.

He swung an axe on spending for 2000/2001 (April-March) to try to bring down the deficit from 5.6 percent of GDP in 1999/2000, and forecast an economic growth rate of 7-8 percent for the next 10 years.

Sinha proposed the introduction of a single-rate value-added-tax of 16 percent, and raised the surcharge on personal income tax. But the peak rate for basic customs duty was cut to 35 percent from 40 percent, and a rationalisation of the tariff slab was proposed. The fiscal deficit target for 2000/2001 was set at 5.1 percent.

A plan to increase the maximum limit foreign funds can take in local firms from 30 percent to 40 percent provided some good news for the markets. But investors' initial reaction was bearish as the benchmark Bombay Stock Exchange index fell more than one percent in response to a hike in the tax rate on domestic firms' dividends to 20 percent from 10 percent and phasing out of export tax concessions.

Sinha also proposed liberalising some capital account transactions. Indian companies will be given greater freedom to spend hard currency to buy foreign knowledge-based businesses, and the cap on automatic clearance for overseas takeovers was raised to $50 million from $15 million.

He mapped out a more aggressive strategy on privatisation, shutting down loss-making public sector units, and corporatising state utilities like telecoms, ports and airports.

SHARES FALL

Indian shares fell on Tuesday after Finance Minister Yashwant Sinha presented a budget that increased companies' tax burden, with the main index dropping over five percent, dealers and analysts said.

Stocks fell amid concerns over a move to double the rate of dividend taxes to 20 percent and phase out tax concessions on export earnings over five years.

The benchmark Bombay exchange index closed 5.12 percent or 293.71 points down at 5,446.98. It was the index's largest fall since the beginning of the year in both point and percentage terms.

It had gained 14 percent since the start of the year, hitting an all-time high of 6,150.69 mid-February and had been prepared by Sinha for a tough budget.-Reuters