India Proposes Higher Spending, Borrowing and Taxes in Union Budget

Devan Biswas
16 Mar, 2012
New York City

Finance Minister Pranab Mukherjee unveiled central government budget for the next fiscal year that will increase government spending by 18%, raise government borrowings by 7% and proposes to retroactively tax overseas mergers that involve Indian assets.

[R]9:00 PM Mumbai – Finance Minister Pranab Mukherjee unveiled central government budget for the next fiscal year that will increase government spending by 18%, raise government borrowings by 7% and proposes to retroactively tax overseas mergers that involve Indian assets.[/R]

In Mumbai the benchmark index declined 1.2% after India’s government proposed latest $298 billion budget for the next fiscal year that begins on April 1. The government hopes to cut subsidies to farm sector to 2% from 2.4% of GDP in the current fiscal year.

The government estimated economic growth of 6.9% in the fiscal year ending this month and held out expectations of 7.5% growth in the next fiscal year, one of the fastest in the world.

The government spending is expected to increase 18% and central government plans to increase borrowings to $90 billion from $85 billion, much of it from the domestic market.

The government estimated budget deficit of 5.9%of gross domestic product, substantially higher than its first estimate of 4.5% and forecasted next fiscal year deficit to decline to 5%.

The sustained elevated government spending and borrowing has largely neutralized the tight monetary policy of the Reserve Bank of India and contributed to a sharp upswing in inflation that has spawned widespread discontent across the nation which mostly hits the middle class and the poor.

The annual inflation has hovered above 9% for the most of the last six years and prices of food, fuel and basic services have more than tripled in the period. The latest bout of elevated inflation is rooted in excessive government spending and borrowings to funds huge subsidies programs for the poor.

Pranab Mukherjee also proposed to amend tax laws retroactively dating back to all merger deal since 1962 that involves Indian assets.

The tax law is widely expected to be controversial and is an attempt by the government to collect capital gain tax of as much as $2 billion after the U.K. based Vodafone agreed to acquire second largest mobile career controlled by Hutchison Whampoa Ltd based in Hong Kong.

The Supreme Court’s decision struck down the government’s attempt to collect tax on the deal in January but based its decision on the Indian tax law that could be revised by the government at a later date.

The government hopes that the amendment will allow it to collect as much as $8 billion in taxes on deals involving assets in India.

Finance minister Mukherjee also offered to not tax individual income with annual income of less than 200,000 rupees or $4,000 a year and tax at a rate of 10% for income up to rupees 5 lakhs ( or 500,000 ) and at a rate of 20% for income between rupees 5 lakhs and 10 lakhs.

For all income above 10 lakhs rupees will be taxed at 30%.