Page last updated at 10:45 GMT, Monday, 6 July 2009 11:45 UK

India outlines growth challenge

Nrega
The government will spend more on the jobs-for-work programme

India's government has unveiled its annual budget, saying the "first challenge" is to return to a growth rate of 9% a year "at the earliest".

Finance Minister Pranab Mukherjee said the growth rate for the present fiscal year was projected at 6.7%.

He said the second challenge would be to "deepen and broaden the agenda for inclusive development".

The government increased spending on urban poor schemes and the landmark jobs-for-work scheme to help the poor.

But shares fell as the budget was announced, with the benchmark Sensex index closing more than 5% lower, as the market worried about how the government would fund its increasing deficit.

The index shed 869.65 points, or 5.8%, to a provisional close of 14,043.40.

India's fiscal deficit expanded to 6.2% in 2008-09 as the government launched stimulus spending to mitigate against world recession.

Traders were concerned by forecasts that the fiscal deficit for the year to March 2010 would hit 6.8% of GDP, after expectations that it would expand by up to 6.5%.

They were disappointed that Mr Mukherjee failed to embark on any major economic liberalisation, instead opting to to invest in infrastructure and projects helping India's rural poor.

'Challenges'

KEY BUDGET TOPICS
The biggest risk the government faced was disappointing voters.

With this self-styled populist budget, it will have done almost all the things it promised to.

The main focus is on rural development and there are a raft of new economic and social development plans.

It has also boosted infrastructure funds, tweaked the tax system, and provided food guarantees to some of India's poorest people.

But there are still questions over how it will finance it all. The budget deficit will widen to 6.8%, and there is little room to raise taxes.

Boosting the economy will be key to its success.

Ben Richardson, Editor, BBC India Business Report

Mr Mukherjee said the states should remove bottlenecks to speed up infrastructure projects, and announced increased funds for construction of highways and flood prevention schemes.

"The first challenge is to return the GDP growth rate of 9% at the earliest," Mr Mukherjee said.

"The second challenge is to deepen and broaden the agenda for inclusive development."

Prime Minister Manmohan Singh said the budget was essentially a rural development budget, and also that it would accelerate growth.

Analysts meanwhile have said it was a populist, spending, budget to kick-start India's economy.

'Further stimulus'

The finance minister said that there were "signs of revival in domestic industry and foreign investors have also returned to Indian markets in the last couple of months".

"It is possible that the two worst quarters since the global financial meltdown in September 2008 are behind us," Mr Mukherjee said.

Mr Mukherjee said the government could not "afford to drop its guard".

"We have to continue our efforts to provide further stimulus to the economy," he said.

The Indian economy grew 6.7% in the year to the end of March 2009, but had grown by an average of 8.8% in the previous five years.

Deficit

The government has pledged "inclusive" growth to boost rural development and social initiatives.

Exports - which make up about 15% of gross domestic product - have also fallen, as overseas demand for goods continues to shrink in the global recession.

Harish Galipelli, head of research at Karvy Comtrade said: "By pushing banks to lend aggressively to farmers, we can expect an increase in the productivity of agricultural produce.

"With incentives for exporters, export-oriented commodities like cotton and spices may rule firm."

The government under Prime Minister Manmohan Singh is well placed to embark on economic changes, having won a new term with a strong margin in May.

India's sovereign rating of BBB-minus, which was placed on negative outlook in February, is not likely to change, said Standard & Poor's Takahari Ogawa.



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