India hikes spending while vowing to tackle deficit

India's government proposed a 16-percent jump in pre-election spending Thursday targeted at voters in rural areas, while also pledging to shrink the gaping public deficit which has alarmed investors.

Finance Minister P. Chidambaram, presenting the 2013/2014 budget to parliament, acknowledged the economy was in a "trough" and that he had been required to cut expenditure in the current financial year.

Thanks to a dose of austerity, he said the government had "retrieved some economic space" which would allow him to increase spending by 16 percent to 16.6 trillion rupees ($31 billion) in the year beginning April 1.

The large increase defied expectations of belt-tightening, but higher revenues are expected through a wider tax net, along with a temporary 10-percent surcharge on the rich and higher levies on cigarettes, high-end imported vehicles and luxury goods.

Chidambaram said he believed there was a spirit of philanthropy in "every affluent taxpayer so that when I ask the relatively prosperous to bear a small burden for just one year they will do so cheerfully".

The Harvard-educated lawyer pledged to shrink the public deficit, a cause of concern for investors and ratings agencies, to 4.8 percent of gross domestic product in 2013/14 from 5.2 percent in the current year.

Worries about India's public finances led rating agencies to warn India last year that its sovereign rating could be downgraded and analysts will look hard at the credibility of Chidambaram's tax-and-spend plans.

"You see the the expenditure side is really up, the revenue side is also up. Somehow I see that the math is not matching up," Naina Lal Kidwai, country head of HSBC Bank, said on a television panel immediately afterwards.

On the Bombay Stock Exchange, stocks fell 0.73 percent, or 139.93 points, to 19,012.48 in mid-afternoon trading.

Chidambaram had been under pressure from his colleagues in the under-fire Congress government to find money to spend on populist measures likely to gain votes in rural areas, where national elections will be won or lost next year.

He hiked spending on rural development by a huge 46 percent, while the budget for education rose by 17 percent and spending on loans to farmers is to increase by 22 percent.

A total of 100 billion rupees was set aside for a food security scheme to tackle malnutrition which is expected to subsidise the sale of huge quantities of grains to nearly 70 percent of the country's population.

The defence ministry suffered more than others, winning a mere 4.9-percent increase to 2.03 trillion rupees as it looks to continue a vast modernisation programme that has made India the world's biggest arms importer.

Chidambaram has been attempting a course correction since being reappointed to the finance portfolio in mid-2012 when his leftist and widely criticised predecessor Pranab Mukherjee was elected president.

He has introduced a string of reforms -- opening India to wider foreign investment and cutting deficit-ballooning spending and subsidies -- to avert a damaging rating downgrade and boost investment spending.

Attracting foreign capital remained an "imperative" for India to finance its deficits, he stressed.

"I have been at pains to state over and over again that India at the present juncture does not have a choice between welcoming and spurning foreign investment," Chidambaram told parliament.

The budget came amid a gloomy backdrop, with the economy projected to expand by 5.0 percent this fiscal year to March -- marking a decade low -- and far under the 7.6 percent growth projected in last year's budget.

"I acknowledge that the Indian economy is challenged, but I am absolutely convinced that with your cooperation, we will get out of the trough and get on to a high growth path," Chidambaram said.

Growth figures for the October-December quarter are set to be released later Thursday.

An official growth forecast published on the eve of the budget for the 2013-14 fiscal year predicted expansion of 6.1-6.7 percent.

The chairman of the government's economic advisory committee C. Rangarajan called the budget a "commitment to fiscal prudence and growth".

Prime Minister Manmohan Singh commented that the "finance minister has done a commendable job given the challenges faced by economy".