India's finance minister Thursday unveiled a national budget with a promise to put Asia's third largest economy back on a path of high growth and to trim the fiscal deficit.
Palaniappan Chidambaram told Parliament that attracting foreign investment was crucial to reversing India's economic slowdown and getting the nation back to fiscal health. Reducing the budget deficit meant the government had no choice but to cut spending, he said.
The budget foresees total expenditure of 16.65 trillion rupees ($306 billion) in the fiscal year that begins April 1. The finance ministry forecast the fiscal deficit to decline to 4.8 percent of gross domestic product from 5.2 percent expected in the current fiscal year.
Among measures to boost revenue, the minister announced a temporary tax hike for the "super rich." The 42,800 people with annual income over 10 million rupees ($186,000) would pay the additional tax for one year.
He also hiked taxes on imported luxury cars, high-end motorcycles and yachts, all of which have become symbols of affluence among India's upper classes. Cigarettes, cigars, mobile phones and SUVs would cost more, as would dining at expensive restaurants, Chidambaram said. Big companies would pay more tax to boost government revenue.
The budget comes against the backdrop of a downhill slide in India's economic growth from earlier levels of 9 percent. The economy is projected to grow about 5 per cent this fiscal year ending March, far below the 7.6 per cent growth projected in last year's budget and prompting calls from economists for an increase in the pace of economic and financial reforms.
The government, led by Prime Minister Manmohan Singh, has over the past two years tried to push through legislation to ease restrictions on foreign investment and allow international retailers to open supermarkets here. But it has faced stiff resistance from opposition politicians, who shut down Parliament over the issue, casting doubt on the government's ability to execute reforms. Last week, India's trade unions and bank employees unions held a country-wide strike to protest economic reforms.
Singh hailed the new budget, saying India "should get back to 8 percent growth in 2 to 3 years." The finance ministry has forecast growth of between 6.1 percent and 6.7 percent in the new fiscal year.
Chidambaram announced a marginal increase in defense expenditure with the budget for safeguarding the country increased to 2.03 trillion rupees ($37.7 billion). The budget has a provision of 867.4 billion rupees for India, the world's top arms and defense equipment buyer, to purchase new defense equipment in the next fiscal year.
With the country headed for general elections in 2014, government spending on costly social programs was projected to go up substantially. The budget has assigned 100 billion rupees for an ambitious food security program.
Chidambaram told lawmakers the country was also facing a current account deficit crisis due to huge imports of oil, coal and gold and a slowdown in exports.
Chidambaram said India would need around $75 billion this year and next year from foreign investment and external commercial borrowing to bridge the current account deficit. The current account is a broad measure of trade and investment balances with the rest of the world.
"India at the present juncture does not have the choice of welcoming and spurning foreign investment. We need to welcome foreign investment," he said.
Opposition political leaders said the budget only made cosmetic changes in taxation and expenditure.
It was "extremely low on substance, with nothing to offer to the poor, and a substantial reduction in budgetary support for the economically deprived," said Arun Jaitely, a leader of the main opposition Bharatiya Janata Party.
Business leaders gave it a higher rating.
"The finance minister's intentions are very clear: to move India back to a higher growth plane. And given his lack of runway, he has taken lots of small measures which together could boost growth," said N. Chandrasekaran, CEO and Managing Director of Tata Consultancy Services, India's top outsourcing company.
Chidambaram tried to dispel the general air of despondency over the Indian economy's slowdown, saying it was "not all doom and gloom."
"Only China and Indonesia are growing faster than India, and achieving high growth is not beyond India's capacity," he said.
"We have done it and we will do it again."