Slowing growth, polls could push finance minister into cutting taxes

Finance minister Palaniappan Chidambaram may cut taxes in this week’s Budget, aiming to spur an economy that last quarter probably grew at the slowest pace in more than two years.
Chidambaram may reduce corporate levies and make more personal income tax exempt in his 29 February Budget, said Tushar Poddar, an economist at Goldman Sachs Group Inc. Data due the same day will show the economy expanded 8.4% in the three months to 31 December, slowing from 8.9% in the previous quarter, according to a Bloomberg survey.

The Harvard-trained minister may use the Budget to stimulate Asia’s third largest economy after inflation-fighting interest rate increases by the Reserve Bank of India (RBI) since October 2004 hurt consumer demand. Lower taxes will also help secure voter support at general elections coming up anytime before May 2009.
“The overarching theme for this year’s Budget will be populism,” Goldman’s Poddar said. “With growth expected to slow due to higher rates and uncertainty regarding the impact of the US recession, we expect the finance minister to provide some stimulus by reducing corporate and income taxes.” Chidambaram, whose Congress party also faces nine state elections this year, may remove levies amounting to 3.9% imposed in addition to the company tax rate, effectively reducing corporate tax liability to 30%, Poddar said.
JPMorgan Chase and Co. senior economist Rajeev Malik expects a cut in excise duties on consumer goods, such as two-wheelers, besides an increase in the income tax exemption limit to Rs125,000 from Rs110,000 in a nation where only 32 million of the population of 1.1 billion pay taxes.
The minister this month described the growth forecast for the current year as “disappointing” after the statistics department said India’s $906 billion (Rs35.9 trillion) economy will expand 8.7% in the year to 31 March, the first slowdown in three years. Growth averaged 9.5% in the last two years.
“Fiscal measures will help to keep the economy going,” said Devan Kaloo, who helps manage $9 billion for Aberdeen Asset Management Ltd in London. “However, rising expenses on subsidies limit the ability for a major cut in tax rates.”
Though Chidambaram may forecast a reduction in the budget deficit to 3% of gross domestic product (GDP) by 31 March 2009, from a targeted 3.3% of GDP in the previous year—in line with the requirements of law—he has treated bonds issued by the government to oil and fertilizer companies in the past two years as “off-budget” items.
In the 10 months to January, the government has given bonds worth Rs15,200 crore to oil and fertilizer companies for selling below market prices. The International Monetary Fund estimates India’s budget deficit to be closer to 4.5% of GDP in the current year ending 31 March 2008, including these “off-budget” subsidies.
Concerns over the country’s budget deficit and total debt, which is more than 75% of its GDP, have hurt India’s credit ratings, increasing borrowing costs for companies.
Moody’s Investors Service has a Ba2 on India’s long-term local currency rating, which is two levels below investment grade, while Standard and Poor’s has assigned a BBB-, their lowest investment grade.
India, which outlays 40% of its revenue on interest payments, subsidies and defence, has additional spending pressure in an election year. The Sixth Pay Commission, formed in 2006 to revise salaries of government workers, is scheduled to submit its report this year.
Chidambaram may provide for basic salaries of government staff to rise as much as 40% in addition to higher pensions and other benefits, HSBC Group Plc. economist Robert Prior-Wandesforde estimates.
And with the Congress party suffering electoral reverses in almost all state polls in the past year with consumer prices remaining high, Chidambaram may waive farmers’ debt and spend more in rural areas, he said.
Source: Mint