Chance for major reforms in India missed

New Delhi: India said yesterday its fiscal deficit would blow out to the biggest level in 16 years as it boosts spending to support the slowing economy, disappointing investors who dumped stocks and bonds.

Investors had hoped the new government would use a strong re-election mandate to push through pro-market reforms, but the populist budget it unveiled lacked significant policy changes and focused heavily on increased borrowing and spending to aid farmers and the poor.

Stocks tumbled nearly six per cent, bond yields spiked and the rupee weakened after Finance Minister Pranab Mukherjee, sticking to the ruling Congress party's theme of "inclusive growth", said the fiscal deficit for the year ending March 2010 would increase to 6.8 per cent of gross domestic product (GDP).

Investors had expected the fiscal deficit to grow to up to 6.5 per cent, from 6.2 per cent in the previous year.

"While the thrust on agriculture, infrastructure, etc., augurs well from a long-term growth perspective, the fiscal profligacy is quite obvious in the near term," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

Budget documents showed the government's gross market borrowing in the fiscal year would total a record Rs4.51 trillion ($93.4 billion), 14 per cent higher than a Reuters poll forecast and 23 per cent higher than the borrowing target cited in an interim budget in February.

Mukherjee said overall spending would increase by 36 per cent this year, but also called for a return to fiscal responsibility targets "at the earliest".

His budget document said the fiscal deficit target would be closer to three per cent of GDP in the year that ends in March 2012, assuming a global economic recovery.

"Yes, I have left a huge fiscal deficit, no doubt, but with the objective of having adequate money to inject in the system to help the productive sectors and to lead the demand-led growth," Mukherjee said on television after his speech.

He said he hoped nine per cent economic growth can be achieved next year.

Mukherjee also said states had agreed on the general structure of a goods and services tax (GST), which may be implemented as early as next year and is expected to simplify the country's tax structure and boost revenues.

Market watchers expressed concern that Mukherjee did not unveil significant reforms nor provide details on plans by the government to sell stakes in state-controlled companies, which would reduce budget pressures.

"He did not come out with key policy changes - PSU [public sector undertaking] disinvestment, securities transaction tax, raising FDI [foreign direct investment] limit for banking and insurance and FII [foreign institutional investor] limit for key sectors," said Madhavi Vora, managing director, ULJK Securities.

"It is really a big disappointment," she said.

Mukherjee said states should remove bottlenecks for infrastructure projects, and outlined plans for more flexible financing for infrastructure and development of long-distance gas pipelines.

Inadequate power supplies and transport links have long choked India's growth.

Unconstrained by its previous alliance with leftist parties, the new government had a freer hand to implement economic liberalisation measures to drive growth, but instead focused its budget on rural development and support of social programmes.

"It is essentially a rural development-oriented budget," Singh said on television. "It is a measure of our commitment to the well-being of the poorer sections of our community."

India is hobbled by a fiscal deficit that ballooned to 6.2 per cent in the financial year that ended in March. Including off-balance sheet items like subsidies for fuel and food, as well as state-level shortfalls, India's overall fiscal deficit for the year that ended in March was about 10 per cent of GDP.