SCEPTICISM GREETS BUDGET BID TO LIFT RURAL ECONOMY: ECONOMISTS FEAR HELP FOR THE POOR WILL LEAK AWAY

Financial Times, UK
March 1, 2005

By Edward Luce,

By India's parliamentary standards, yesterday's budget speech was plain
sailing - except for one bout of sustained heckling. That was when
Palaniappan Chidambaram, the finance minister, announced a relatively
minor 0.1 per cent tax on any daily cash withdrawal greater than Rs10,000
(Dollars 230, Euros 175, Pounds 120).

This trivial - if unconventional - measure was aimed at curbing India's
black economy. The ensuing uproar lasted for five minutes. "I think a lot
of people criticising the measure are not worried about the Rs10 they'd
have to pay, but about the fact there would be a tax trail," Mr
Chidambaram said later.

The incident illustrated India's huge administrative challenge - that the
country's gamekeepers are widely regarded as its chief poachers. Such
considerations are less trivial when applied to Mr Chidambaram's more
substantial announcements.

Of these, the most important was almost Dollars 6bn (Euros 4.5bn, Pounds
3bn) of new spending aimed at uplifting the 60 per cent or so of India's
1.1bn people who live in its rural economy. Many of the schemes, including
a project to increase irrigated land by 10m hectares and a big expansion
in spending on primary education and nutrition for young children, are
badly needed.

But how much of Mr Chidambaram's largesse will reach the intended
beneficiaries? Depending on which of India's 28 states you look at,
anything between a third and four-fifths of India's social spending fails
to reach the target because of leakage and corruption.

In a nod to such concerns, Mr Chidambaram said there would be more
explicit monitoring of where public money went. But many economists -
already rattled by Mr Chidambaram's decision to press the "pause button"
on next year's fiscal deficit reduction targets - say there are grounds to
be sceptical.

None of the new spending measures provoked the slightest murmurs from Mr
Chidambaram's colleagues within the multiparty coalition, its allies in
the Communist parties or from the opposition Hindu nationalists.

"This is India so the proof of the pudding will be in the eating," said
Dominique Dwor-Frecaut, director of Barclays Capital in Singapore.
"Overall the budget reflects the political realities of coalition politics
- but within those limits it does push the reform agenda forward as well."

Mr Chidambaram did not take a scythe to India's thicket of tax exemptions,
as had been recommended in a much publicised finance ministry report last
year. However, the finance minister did reduce both the corporate and
personal income tax burdens, and slashed peak import tariff duties from 20
per cent to 15 per cent. Mr Chidambaram also removed 106 sectors from the
restrictive "small-scale industries" net, which penalises successful small
businesses. He also confirmed the much-awaited national value added tax
system would be launched on April 1, when the new financial year begins.

"This was a middle-of-the-road reformist budget," said Shankar Acharya, a
former chief economic adviser to the finance minister. "He didn't set us
on fire, as many had hoped, but there was nothing to complain about."

Perhaps the most striking passage in Mr Chidambaram's speech was received
in silence: "At a recent meeting of G7 finance ministers in London (that
India and China attended) China's finance minister looked in my direction
and said China had received Dollars 60bn of foreign direct investment in
2004," he said. India's FDI last year was less than 10 per cent of China's
level.

There were mild protests from leftwing MPs when Mr Chidambaram went on to
announce plans to open up India's pensions and mining sectors to foreign
investors. He pointed out the most thriving portions of India's economy -
telecommunications, automobiles, software and electronics - were the most
open to FDI.

Business executives were generally positive about a budget that is likely
to further boost India's equity bull market - the benchmark Sensex index
rose 144 points yesterday to close at 6,713. From lowering corporate taxes
to reducing tariffs on capital goods imports, it was mostly good news,
they said. Some even applauded the rural spending plans.

"The more money there is in rural pockets the better it is for us," said
Sunil Mittal, chief executive of the Bharti group, India's largest mobile
telecoms provider.