India’s Finance Minister Palaniappan Chidambaram produced a populist annual budget this morning, aimed primarily at helping the rural poor, whose plight contributed in 2004 to the defeat of the country’s last Bharatiya Janata Party-led government.

In a dramatic gesture that almost eclipsed the rest of his 30-page speech, he waived overdue loans totaling an estimated $12.5 billion that are owed by 30 million farmers who have less than two hectares (five acres) of land. He pledged another $2.5 billion to help 10 million more settle loans.

Chidambaram also boosted the government’s spending on education by 20% and on health by 15% - both initiatives that will help the poor if they improve frequently dilapidated and under-performing social services.

India seen cutting taxes to boost growth, votes

http://in.reuters.com/article/businessNews/idINIndia-32090820080222?sp=true

Fri Feb 22, 2008 1:37pm IST

By Unni Krishnan

NEW DELHI (Reuters) - The government is likely to extend tax breaks on personal income and cut duties on consumer goods in its annual budget as it looks to boost spending and revive slowing growth before general elections due by May 2009.

Analysts say the centre-left government wants to leave more money in the hands of consumers when it unveils the 2008/09 (April-March) central budget on Feb. 29, its last full one before it faces the ballot.

Raising the tax-free income limit to boost consumer spending, lowering taxes to drive retail prices down and cutting an additional corporate tax are likely to be the centrepiece of Finance Minister Palaniappan Chidambaram's plan.

"Since last year's tax collections were buoyant, it gives him some leeway, and since next year is an election year, there is a likelihood of populist decisions," said Rupa Rege Nitsure, economist with Bank of Baroda.

"He may increase the income-tax exemption, and on corporate taxes he will look at phasing out surcharge."

Tax receipts have risen on a booming corporate sector and rapid economic expansion in recent years.

Latest finance ministry figures show corporate tax receipts rose 39 percent to 1.38 trillion rupees ($34.5 billion) between April and mid-February from the same period a year earlier, and income tax receipts rose 46 percent to 903.56 billion rupees.

Direct taxes receipts crossed 2.29 trillion rupees in the period, up 40 percent from a year earlier, and looked set to top 3 trillion in the fiscal year which ends on March 31. The government had set a target of 2.67 trillion rupees for 2007/08.

CUTTING TAXES TO BOOST GROWTH

Economic growth, which has exceeded 9 percent in the past two fiscal years, is likely to moderate to 8.7 percent this fiscal year due to a series of interest rate rises which slowed demand for cars, real estate and some consumer durables.

Analysts said the revenue dividend from the surge in growth has given the finance minister room to use tax cuts to tackle this problem without having to worry much about public finances.

The government hopes lower duties on items such as washing machines, television sets and motorbikes will boost consumer demand slowed by high interest rates.

"I expect some duties on consumption sector, durables likely to be brought down, especially on cars, commercial vehicles; the latter showing sharp slippage in growth," said Shubhada Rao, chief economist with Yes Bank.

Rao also expects the Congress party-led coalition to phase out a surcharge on taxes paid by companies, helping them sustain profitability. The surcharge is 10 percent on a tax rate of 30 percent, making the effective corporate tax rate 33 percent.

Analysts also see Chidambaram possibly cutting peak import duties marginally from 10 percent to bring them closer to those in the Association of South East Nations and to help restrain inflation, which has risen above 4 percent in annual terms and is expected to rise further before the end of 2007/08.

As for lost collections, the government hopes the resultant surge in economic activity will make up for it.

Chidambaram may have a few other aces up his sleeve. Analysts say he could cut excise, or factory-gate tax, from an average 16 percent in the hope this would be passed to consumers via lower retail prices.

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