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Last Updated: Friday, 29 February 2008, 12:18 GMT
India gets populist pre-election budget
Paranjoy Guha Thakurta
By Paranjoy Guha Thakurta
Indian economy analyst

Indian farmer
Growth in the farm sector has been sluggish

Elections in the world's largest democracy are not very far away.

Though the five-year term of the centre-left coalition government in New Delhi ends in May 2009, there were strong indications that the next general elections could be held ahead of schedule given the populist tone of Friday morning's annual budget of the union government.

It has announced loan waivers for farmers and cuts in taxes on incomes paid by India's influential middle class.

Harvard-educated Finance Minister Palaniappan Chidambaram - who has a reputation for favouring market-friendly economic policies - is the second Indian finance minister to present five budgets in a row during the tenure of a single government.

The first to do so in the early-1990s was Manmohan Singh, India's current prime minister, who is considered the architect of the country's economic liberalisation programme initiated more than 16 years ago.

Loans waived

The most significant aspect of the budget for the financial year that will conclude at the end of March 2009 was the announcement of a slew of loan waiver schemes that will cost the central exchequer an amount equivalent to $15 billion.

While the loan waiver schemes - reminiscent of a similar effort made in 1990 - is bound to be criticised by economists for discouraging those who diligently repay loans, it will be welcomed by government politicians with an eye for votes of farmers.

Farmers blocking railroad to demand loan waiver in India
Over 150,000 farmers have taken their lives in the past ten years

Significantly, these loan waiver schemes - that are expected to benefit 30 million small and "marginal" farmers (holding less than 2 hectares of land) and 10 million other farmers - will have to be completed by the end of June, the finance minister announced.

Two out of three Indians depend on agriculture for their livelihood. The farm sector that accounts for less than one-fifth of the country's gross domestic product has been growing the slowest.

Whereas the economy as a whole has expanded by a record 9% a year three years in succession for the first time since India became politically independent in 1947, the farm sector has languished and is slated to grow by a niggardly 2.6% this financial year.

What has become a politically volatile issue in recent years is the high incidence of farmers committing suicide - not less than 10,000 a year, according to government estimates - because of their inability to repay loans taken mainly from usurious local moneylenders.


Although barely 3% of India's 1.1bn population pay personal income tax, Mr Chidambaram has announced an effective cut in tax rates that would benefit the middle classes, especially the salaried sections that have taxes deducted before they receive their pay cheques.

This vocal section of the country is also disaffected by the rise in food prices over the last 15 months though inflation has hit the poor - comprising at least a fourth of the total population - really hard.

Indian Finance Minster P Chidambaram
Mr Chidambaram's budget is meant for an election year

Another populist initiative of the government has been to extend the coverage of the National Rural Employment Guarantee Act to all rural areas in the country.

The act, described as the world 's largest social security programme, guarantees 100 days of work in a year entailing manual labour to every family demanding such work at the official minimum wage.

Mr Chidambaram has also announced health insurance schemes for workers in the unorganised sector - comprising more than 90% of India's working class. That's the ranks of self-employed, day labourers and other groups of non-unionised workers.

This was an important recommendation of a committee headed by Arjun Sengupta, a left-leaning MP of the ruling Congress Party.

The finance minister has also not introduced any policy measure that could have been vetoed by the 60-plus MPs belonging to the left parties on whom the ruling United Progressive Alliance coalition depends for a majority in the Lok Sabha, India's lower house of Parliament.

Playing safe

A day before the budget was announced, on Thursday, a section in the "Economic Survey" - an annual report card of the government on the state of the economy - raised expectations that controversial privatisation initiatives may be considered as well as changes in labour laws and policies on foreign direct investment in retail and insurance.

However, Mr Chidambaram has chosen not to antagonise his Communist comrades by proposing such controversial initiatives - the left is already up in arms against the government on account of the proposed nuclear energy agreement with the US.

People in Mumbai watch the budget on television
The middle classes are concerned over the rise in food prices

Whereas high world crude oil prices, the slow growth in domestic farm output and the impact of the slowdown in the US economy on India's volatile capital markets have posed problems for the finance minister, he has been rather lucky (to use his own words) in cutting budget deficits because tax revenues have been extremely buoyant - direct taxes on personal and corporate incomes have jumped 40% over the last year.

"Mr Chidambaram is confident that the growth momentum will be sustained despite the fact that GDP growth has slowed down from 9.6% in 2006-07 to an expected 8.7% this fiscal year," said BB Bhattacharya, economist and head of New Delhi's prestigious Jawaharlal Nehru University.

The finance minister has chosen to provide income tax concessions because his strategy of improving revenue collections while moderating tax rates has worked commendably because of higher compliance, Prof Bhattacharya added.

"The finance minister is also hopeful that the growth in corporate profits would continue," he said.

Budgets in India are traditionally much more than bland statements of financial accounts or even, economic policies.

The presentation of the budget is an occasion to make political pronouncements and this is particularly true this time round.

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