Search the Internet          Tips  Sites: Finance, Investment

Few options to boost growth seen for Indian budget

India's flagging economy badly needs a boost but the country's cash-strapped government may not be able to provide much of a spur in next month's budget, analysts say.

Most independent forecasters expect the economy, rated among the world's fastest growing in the past decade, to grow by around six percent in the fiscal year to March 2001.

That is a healthy clip given a backdrop of sluggish global growth, but it falls below the 6.8 percent recorded in 1998/99 and the 6.4 percent estimated for 1999/2000.

"The finance minister appears to be in a tight spot. The situation appears worse than last year," said Pradeep Srivastava, chief economist at the think-tank National Council for Applied Economic Research.

Analysts say the economy needs to grow by around 10 percent a year if India is to meet the needs of its teeming population, which now exceeds one billion.

But a stimulus is badly needed to shift growth into higher gear -- either through government spending or tax cuts or a combination of both, analysts say.

Investors wary

Private capital cannot come to the rescue with investors wary of committing funds in an uncertain economic climate or unable to raise the money because of volatile capital markets.

There will be little aid either from foreign investors who chafe at India's bureaucracy and lack of infrastructure.

That leaves the economy looking to the government for help. But given the huge level of federal debt, Finance Minister Yashwant Sinha has few options as he prepares to present the federal budget to parliament on February 28.

With the fiscal deficit expected to be around 5.1 percent of GDP in 2000/01, Sinha has little leeway to cut taxes.

And the finance minister will have little left to spend after about 60 percent of the government's revenues has been eaten up by relatively inflexible payments such as salaries, interest on past debt, subsidies and defence payments.

Industrial output more than doubled to eight percent in 1999/2000 from 3.9 a year earlier, but has been sluggish in the current fiscal as a consumption-led recovery ran out of steam.

"At least last year when he made his budget, the economy was in a recovery phase," Srivastava said.

The industrial slowdown will prove to be a handicap for Sinha's budget and it is bound to put pressure on him to take steps to reverse the trend, analysts say.

Be daring

"The real challenge for the finance minister would be the revival of industrial growth and he has to take some daring and innovative steps," T K Bhowmick, economist with the Confederation of Indian Industry (CII), said.

Industrial production growth eased to 6.0 percent between April and November from 6.2 a year earlier.

Bhowmick said a consumption- and investment-driven strategy would be one way out for Sinha.

"To tackle the demand slowdown, he should lower the personal income tax burden to give a boost to consumption," he said. "But given the size of the deficit, it would be a difficult task."

Other analysts said Sinha should scrap a surcharge on personal and corporate taxes, as well as a 20 per cent tax on dividends, both imposed last year.

Sinha should also look at taxing services, they said. "I would suggest bringing all services under the tax net rather than discriminating by a pick-and-choose policy," Srivastava said.

Analysts say Sinha could make a big impact by announcing investment in the infrastructure sector, which will in turn attract private investment.

"Investments in infrastructure should be one of the key areas to be addressed in this year's budget," CII President Arun Bharat Ram said.

"Once investments start flowing in to infrastructure, it will automatically impact the manufacturing sector."

Tell us what you think of this report