India raises spending while promising smaller deficit

India's government increased spending by 16 percent on Thursday as it geared up for elections next year, in a budget that promised higher outlays for rural voters but a smaller public deficit.

Finance Minister P. Chidambaram announced big increases for rural development, health and education. With an eye on the country's hundreds of millions of poor, he said he would ask the rich to help pay for the rises.

But wary of global ratings agencies which have threatened to downgrade India's credit ratings to junk, he pledged to cut the fiscal deficit to 4.8 percent of gross domestic product from 5.2 percent in the current fiscal year.

Chidambaram, talked of as a possible candidate for prime minister in the elections next year, insisted his deficit numbers were "credible" as economists expressed surprise at the scale of the increased spending.

The deficit target for the financial year to March 2014 is a "signal to the world and everyone else that we are following a fiscally prudent path", he told a press conference.

He also sought to roll out the welcome mat for the foreign investment needed to overhaul India's dilapidated ports, roads and other infrastructure seen as a major impediment to economic growth.

India "does not have a choice between welcoming and spurning foreign investment. Foreign investment is an imperative," said Chidambaram in his budget speech to parliament.

He took over the portfolio in mid-2012 and has been courting overseas investors since then.

"Doing business in India must be seen as easy, friendly and mutually beneficial," he added.

He presented his budget against a gloomy backdrop, with figures released the same day showing that economic growth slowed to 4.5 percent year-on-year in October-December, down from 5.3 percent in the preceding quarter

The economy, the world's 10th biggest, is projected by the government to expand by 5.0 percent this fiscal year, the lowest figure for a decade, before picking up to 6.0-6.7 next year.

Reacting to the budget, Credit Suisse economist Robert Prior-Wandesforde said: "The (budget) spending brakes have been removed. This is a significantly bigger increase than expected."

Standard and Poor's ratings agency said it was leaving its investment grade credit rating on India unchanged but warned there was "a potential for the government to exceed its budgeted expenditures".

The benchmark Sensex share index closed down 1.52 percent at 18,861.54 points, on worries the government could exceed its deficit target.

To pay for the spending, Chidambaram targeted higher revenues through a wider tax net and introduced measures targeting the wealthy and some high-earning firms, whom he insisted would be happy to pay in a spirit of philanthropy.

The Harvard-educated lawyer slapped a one-year 10 percent surcharge on the 42,800 citizens with declared incomes of over 10 million rupees ($180,000) a year.

"I am confident when I ask the relatively prosperous to bear a small burden for one year, just one year, they will do so cheerfully," he told parliament.

Chidambaram -- who also raised taxes on luxury imported vehicles, yachts, air-conditioned restaurants and cigarettes -- has been under pressure from party colleagues to find money for populist pre-election measures.

Thanks to "a bitter dose" of belt-tightening this year, he said the government had "retrieved some economic space" which would allow him to relax constraints.

He raised outlays on education by 17 percent, health by 24 percent, agriculture by 22 percent and rural development by a massive 46 percent.

He also earmarked $1.8 billion for the government's flagship food security bill intended to provide cheap grains to up to 70 percent of India's 1.2 billion population and reduce rampant malnutrition.

The programme is key to the Congress party's strategy to turn around its flagging fortunes in the 2014 elections.

The defence ministry suffered more than others, winning a mere five percent increase to 2.03 trillion rupees, far lower than the 17 percent year granted in the last budget.