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 Expectations had been high that the government would utilize India's
strongest election mandate in 30 years to take radical steps
comparable to the 1991 market reforms that unleashed an era of high
economic growth.
But in a bid to halt a two-year spell of weak growth, the government
instead announced incremental steps to boost capital spending in
Asia's third largest economy and reassure foreign investors that
they would get fair treatment.
"We shall leave no stone unturned in creating a vibrant and strong
India," Finance Minister Arun Jaitley told parliament, vowing to
raise the pace of economic growth to 7-8 percent in three to four
years from less than 5 percent now.
Jaitley, 61, told lawmakers he would uphold the fiscal deficit
target for this year inherited from the last government - 4.1
percent of gross domestic product - despite expectations he would be
forced to raise it due to weak revenue and high subsidy costs.
Ratings agency Moody's said a lack of detail on how India would cut
the fiscal gap made it "challenging to assess the credit impact" of
Jaitley's budget, but still said it would keep its investment grade
rating for India.
Jaitley announced an 8 percent rise in spending, roughly unchanged
after taking inflation into account. The government will also seek
to raise a record $13 billion from selling state assets - nearly
four times what the previous government raised in the fiscal year
ended in March 2014.
India's budget, an act of theater concentrating decisions that in
other countries are spread over months, was delayed by a general
election in May that handed Modi's Bharatiya Janata Party (BJP) a
landslide victory.
Delivering the second half of his two-and-a-quarter hour address
seated, Jaitley raised the minimum income level at which people
start paying tax and hiked levies on cigarettes and soft drinks.
INVESTOR FRIENDLY?
Jaitley announced he would raise ceilings on foreign investment in
the defense and insurance sectors, but still bar non-residents from
taking majority control in projects to supply the world's largest
arms buyer.
Limits on foreign investment in defense and insurance ventures will
go up to 49 percent from 26 percent - still less than sought by
foreign contractors to justify sharing technology when they locate
operations in India.
In another signature initiative, the government will launch a tax
reform this year to unify India's 29 federal states into a common
market, a measure that would boost revenue while making it easier to
do business.
Investors have piled into Indian stocks on hopes that Modi's
leadership and mandate would break a logjam thwarting a host of
reforms during the 10-year tenure of his predecessor Manmohan Singh,
whose coalition government became increasingly divided.
While the concrete measures announced by Jaitley fell short of the
most bullish expectations, Indian stocks and bonds finished a
volatile day stronger, thanks to his commitment to fiscal probity.
"These measures are very progressive and good for the bond and
equity markets," said Murthy Nagarajan, head of fixed income at
Quantum AMC in Mumbai. "It would lead to a reduction of inflation in
the coming years due to a lower fiscal deficit."
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'BITTER MEDICINE'
Modi, 63, won election with a pledge to create jobs for the 1
million people who enter India's workforce every month. Since taking
office, he has warned that Indians should expect "bitter medicine".
Reflecting that change in tone, Jaitley vowed to adhere to this
year's "daunting" 4.1 percent budget deficit set by the previous
government.
"I have decided to accept this challenge - one fails when one stops
trying," Jaitley told the lower house of parliament. He said the
budget deficit would be reduced to 3.6 percent in the following two
fiscal years.
With the deficit already approaching half of the annual target just
three months into the fiscal year, many economists had expected
Jaitley to raise the borrowing target to 4.4 percent.
Jaitley managed to find room in the budget to fund projects to
upgrade India's food distribution infrastructure. He raised
subsidies on fertilisers and, against expectations of a reduction,
extended diesel subsidies - key measures to aid farmers who face
poor monsoon rains this year.
INVESTOR PROTECTION
The minister said he would set up a high-level committee to review
retrospective tax claims blamed for choking off foreign investment
after companies such as Britain's Vodafone were hit with massive
demands.
Vodafone and India have been locked in a $2.2 billion tax standoff
since the British company acquired Hutchison Whampoa's Indian mobile
assets in 2007.
Vodafone, the world's second-largest mobile operator, thought it had
finally secured victory in the case in 2012, when India's Supreme
Court dismissed the tax demand. But the government responded by
announcing retrospective legislation that would change the rules.
Jaitley sought to reassure investors by promising a stable tax
regime and saying the government would not "ordinarily" create new
liabilities retrospectively, but stopped short of moving to scrap
the law. Several cases in the court will be concluded through the
legal process, he said.
($1 = 59.7600 Indian rupees)
(Additional reporting by New Delhi and Mumbai newsrooms; Writing by
Douglas Busvine and Frank Jack Daniel; Editing by Richard Borsuk)
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