A fine balance

28 February 2007 By Una Galani Follow @ugalani

The weak Congressled government faces national elections in two years. So its budget skirted more contentious issues. Antiinflation policies are taking precedence over more profound reforms. Investors were expecting little, and that s what they got.

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India's Finance Minister Palaniappan Chidambaram on Wednesday presented India's annual budget for the fiscal year starting in April 2007. The Congressled government vowed to tackle inflation, currently at its highest level in two years due partly to a reduction in the output of agricultural commodities. The Wholesale Price Index touched 6.73% in early February, compared to 3.98% a year ago, well above the Reserve Bank of India's preferred ceiling of 5.5%.

The fiscal deficit declined to 3.7% of GDP, better than the 3.8% target set in the previous budget, and is on track to be under 3% by 2009. The national savings rate increased by 7.4% to 32.4%, and tax to GDP ratio increased from 9.2% three years ago to 11.4%.

Corporate tax remained unchanged, with an increase in dividend distribution tax to 15% from 12.5%. Education spending was increased by 34.2%, and as part of the drive to improve infrastructure the budget has proposed using a small part of the country's vast $188bn foreign exchange reserves. Foreign direct investment in the yeartodate amounted to $12.5bn and as outpaced portfolio investment of $6.8bn.

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