Page last updated at 16:12 GMT, Wednesday, 28 February 2007

India's 'left-of-centre' budget

Paranjoy Guha Thakurta
By Paranjoy Guha Thakurta
India economic analyst

Unemployed Indian man collecting waste
The government says it wants to help the under-privileged

India's Finance Minister Palaniappan Chidambaram - who has a reputation for favouring market-friendly economic policies - presented a distinctly left-of-centre federal budget on Wednesday.

It was in keeping with the ideological inclinations of the ruling United Progressive Alliance (UPA) government that is crucially dependent on support from its communist allies.

At a time when the economy of the world's second most populous nation is growing at about 9% a year for the second year in succession, Mr Chidambaram's budget upped government expenditure on agriculture, rural development, irrigation, education, health-care and road construction.

This was as he raised taxes on the corporate sector, helping bring stock market indices downwards.

High prices

While India's Gross Domestic Product (GDP) has grown by an average of 8% every year over the past four years - the first time in the country's 60-year history - the economy has also shown signs of overheating in recent months.

Indian farmers
A third of Indians live below the poverty line

Wholesale prices went up by nearly 7%, and consumer price inflation is at a rate that is roughly two percentage points higher.

Until August, inflation in India was driven by high prices of petroleum products.

Over the past three months, however, the higher rate of inflation is largely due to a sharp jump in food prices, in particular the prices of wheat, vegetables, fruit and milk.

That has resulted in the government being attacked not only by the right-wing Hindu nationalist Bharatiya Janata Party opposition, but also by its supporters on the left.

High food prices quickly translate into popular discontentment.


On Tuesday the Congress party - which leads the UPA coalition - lost local elections in two northern Indian states, Punjab and Uttaranchal, where it had been in power.

Since food comprises so a large a share of the total income of the poor, Finance Minister Chidambaram and Prime Minister Manmohan Singh have been sharply criticised, sometimes even by colleagues in the Congress party, for their inability to control prices.

People in Mumbai watch the budget on television
Indians face a wider services tax net

Reacting to Mr Chidambaram's budget, Mr Singh described it as "anti-inflationary", voicing hopes that proposed reductions in customs and excise duties would reduce higher prices.

Close to one-third of the Indian population, or about 300 million people, live below the internationally-accepted poverty line of $1 a day.

Two-thirds earn daily incomes of $2 or less a day. One out of three Indians cannot read and write their own names and half the children who join primary school drop out.

Mr Chidambaram has instituted new scholarship schemes to provide an incentive to secondary school students to remain in school.

He has also increased expenditure on midday meal schemes for school-going children.

More importantly, the finance minister has increased an across-the-board education tax from 2% to 3% to fund basic education and secondary and higher education.

The extra money will help fund a plan to increase seats in educational institutions to admit students from "socially and educationally backward classes".

'Niggardly growth'

This is part of the government's affirmative action policies, aimed at assisting the under-privileged castes in India's highly hierarchical society.

The manufacturing and services sectors have grown by nearly 10% a year over the past three years.

That is in contrast to the agriculture sector - which accounts for less than one-fifth of India's GDP but still provides a livelihood to 60% of the country's population. The agricultural sector has grown by a niggardly 2% a year.

Indian Finance Minster P Chidambaram
Mr Chidambaram is trying to control inflation

The government has sought to deflect criticism that its policies were helping only the industrial and services sectors by targeting many budget proposals towards farmers.

More crop loans will be provided, production of seeds will be stepped up, and a system for better water supply is planned as part of a wider irrigation programme.

'Impressive increase'

The coverage of an ambitious rural employment guarantee scheme - described as the world's largest legally mandated social security programme - has been expanded from roughly one-third of the country's geographical area to more than half.

Mr Chidambaram has earmarked higher outlays for welfare programmes, while reducing budgetary deficits because tax revenues have been unusually buoyant.

Apart from excise collections - which have not grown fast - collections of customs duties, personal income taxes and taxes on corporate incomes have all increased impressively.

The services tax net has been widened to include rent from commercial properties and asset management services.

India's exports have been growing at a fast pace of 20% a year and the country's foreign trade is growing twice as fast as its GDP.

Against this backdrop, Mr Chidambaram has brought down peak customs tariffs on non-agricultural imports from 12.5% to 10%, bringing these rates closer to the tariff levels prevailing in East Asian countries.

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