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India raises spending while promising smaller deficit

hfP, New Delhi
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, defying analysts' expectations he would deliver an "austerity budget” for the financial year to March 2014.
But with an eye on 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 year.
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 spuming foreign investment Foreign investment is an imperative," said Chidambaram, who 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 amid a gloomy backdrop, with the economy projected to expand by 5.0 percent this fiscal year to March, the lowest figure for a decade.
Growth is forecast by the government at between six and 6.7 percent in the next financial year — still far below near double-digit rates of previous years.
"The (budget) spending brakes have been removed. This is a signif-icantly bigger increase than expected," said an economist from the Credit Suisse investment bank, Robert Prior-Wandesforde.
Naina Lal Kidwai, country head of HSBC bank, warned immediately afterwards that "somehow I see that the math is not matching up."
The benchmark Sensex share index closed down 1.52 percent or 290.87 points at 18,861.54 points, after the rise in spending fuelled investor worries of higher inflation that could delay interest rate cuts.
To pay for the spending, Chidambaram targeted higher revenue through a wider tax net by closing tax loopholes and introducing measures targeting the wealthy, 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 people 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 and goods and cigarettes, has been under pressure from his colleagues in the under-fire Congress government to find money for populist pre-election measures.
Thanks to "a bitter dose" of belttightening 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 as well as increasing spending for roads.
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.