India’s left-backed government vowed to foster investment to maintain strong economic growth and cut the fiscal deficit yesterday in an expansionary first budget with billions of dollars of new spending for the poor.

Announcing a raft of programmes for education, health, jobs farmers, and housing, Finance Minister Palaniappan Chidambaram said boosting investment and business was vital to achieve his targeted growth of 7 to 8 per cent a year and fight poverty.

“The key to growth is investment,” he told parliament. “Public and private. Domestic and foreign.”

“It is my goal to make the environment in India attractive to investors,” he said, adding the government would form a new investment commission.

Although some economists expressed concern about the government’s plans, the rupee and the main Bombay stock index rose slightly on budget measures boosting investment in the power and telecoms sectors and a commitment to encourage foreign investment in telecommunications.

Chidambaran forecast the deficit, which the finance ministry has warned poses a challenge to sustained growth, would fall to 4.4 per cent of gross domestic product (GDP) from 4.6 per cent in 2003/04, but announced no major measures for tackling the issue.

The Congress-led coalition government relies on the support of communists to stay in power. The early details of the budget speech carried a heavy socialist tone.

Announcing extra spending of 100 billion rupees ($2.2 billion), Chidambaram imposed a 2 per cent tax surcharge to raise up to $1.1 billion for extra education spending and a revival of a rural infrastructure fund with $1.9 billion.

“The enhanced spending he has spoken of so far means he has to juggle his numbers somewhere and so the markets may not take it positively,” said Raja Bandyopadhyay, of Birla Sunlife Securities in Bombay.

Analysts also said the government could struggle to implement its ambitious social programmes - including a “new deal for rural India – because of the country’s inadequate infrastructure and glacial bureaucracy.

“He has made good proposals but these must not remain on paper only,” said Bhaskar Rao, of the Centre for Media Studies.

“These proposals must sink deep in the government bureaucracy; the challenge will be in the implementation.”

“We can expect additional taxes on a wide range of fronts and some re-prioritising of expenditure,” said Saumitra Chaudhuri, an economic adviser with domestic ratings agency ICRA

“We can expect some tightness on the fiscal side.” The deficit fell to 4.6 per cent of GDP in the year to March from 5.4 per cent a year earlier, but economists and markets remain anxious the Congress-led coalition government could be tempted to go on a spending binge to fund its social promises.

Few expect a major breakthrough in the deficit battle, seeing economic growth, not tax rises or spending cuts, doing the most to reduce the shortfall.

The rupee and stocks edged up in early trade on cautious optimism of an investment-oriented budget.

Deficit reduction law

“Expectations are modest this time so, even if there are some positive triggers, markets will take off,” said Ravi Malani, of local brokerage IL&FS Investsmart India.

Soon after winning power in May, Prime Minister Manmohan Singh pledged to boost healthcare, education and infrastructure spending to help India’s millions of poor, who have missed the benefits of a booming economy that grew 8.2 per cent in the year to the January-March quarter.

As part of that pledge, he plans to increase spending on healthcare and education to as much as nine per cent of GDP from a few percentage points, though not necessarily in this budget.

But, leaning on communist parties to stay in power, Singh also said he would not sell profitable state firms, cutting the government off from billions of dollars in privatisation income.

However, analysts still expect the government to raise at least 40 billion rupees ($870 million) from selling stakes in state business, especially in the oil and gas sector.

And the services sector, which accounts for 50 per cent of GDP, is also largely untaxed, offering scope for new levies.

Recent media reports have also tipped increased spending on roads and irrigation, a $5 billion offshore bond issue to fund farm aid, a new type of bond to finance development projects and lower tariffs for capital goods imports.

Some reports are also speculating the government will replace the capital gains tax with a turnover tax.

In a move to show its commitment to fiscal responsibility, the government on Monday enacted a law that supposedly forces it to cut the deficit by at least 0.3 percentage points a year – although, like any law, it can be repealed or superseded.

The combined federal and state fiscal deficit is almost 10 per cent of GDP, one of the highest levels in the world.

The finance ministry’s annual report on the economy stressed the need for action, saying the deficit could pump up interest rates and posed a critical challenge to maintaining strong growth in one of the world’s fastest growing economies.

Singh’s government wants growth of between seven and eight per cent during its five-year term. Rapid growth is crucial just to find jobs for the millions of people joining the workforce every year and for any hope of battling poverty in the world’s most populous nation after China.

<B>Surojit Gupta

Rosemary Arackaparambil</B>