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India to cut deficit, improve food security

India to cut deficit, improve food security

February 28th, 2011 in News

NEW DELHI (AP) - India pledged to reduce its deficit while ramping up social spending Monday as the government unveiled an annual budget aimed at balancing populism with fiscal discipline.

High food inflation and a spate of embarrassing corruption scandals have put pressure on India's ruling Congress Party in recent months, spooking foreign investors and sparking street protests in advance of crucial state elections.

In his budget speech before parliament, Finance Minister Pranab Mukherjee revealed no major policy shifts, but said the much-watched fiscal deficit would fall from an estimated 5.1 percent of gross domestic product in the year ending March 31 to 4.6 percent next fiscal year.

Some analysts found that goal overly optimistic, especially given high global oil prices. India imports the bulk of its oil and subsidizes retail fuel prices, at huge cost to the exchequer.

"It will be difficult to achieve this target," said Brinda Jagirdar, head of economic research at the State Bank of India. "There's too much expectation being pinned on growth."

Growth slipped to a lower-than-expected 8.2 percent in the last quarter of 2010, down from 8.9 percent the prior two quarters, government data showed Monday.

The government expects the economy to grow as much as 9.25 percent next fiscal year, up from 8.6 percent in the year ending March 31 even as policymakers worry that the benefits of India's rapid growth aren't spread widely enough.

"The economy has shown remarkable resilience to both external and domestic shocks," Mukherjee told parliament. "Our primary concern this year has been continued high food prices."

India's poor have been hit hardest by the rise in food prices caused by increasing demand and woefully inadequate storage and distribution systems.

The budget hikes social spending by 17 percent over last year, to 1.6 trillion rupees ($35.6 billion), or 36.4 percent of budgeted spending. Mukherjee pledged to introduce a food security bill in the next fiscal year, which would provide cheap grain to hundreds of millions of poor people while also prompting fears of spiraling subsidy costs.

His budget also includes incentives to invest in agriculture, but stopped short of opening India's retail sector to more foreign investment - a contentious step some analysts believe is the only way to attract the necessary funds to expand the nation's food supply chain.

When the Congress Party swept to power in 2009, investor sentiment soared on hopes of fast-track economic liberalization that the government has so far failed to deliver. Recent corruption scandals and regulatory uncertainty have also helped drive much-needed foreign investment out of the country.

Mukherjee pledged to clamp down on corruption and stem the flow of so-called black money to overseas tax havens.

"Corruption is a problem that we have to fight collectively," he said.

The budget loosens some restrictions on foreign investment in Indian mutual funds and infrastructure. Mukherjee vowed to raise 400 billion rupees ($8.8 billion) from selling stakes in state run companies next year - despite missing this year's asset sales goal - and to introduce some much-delayed reforms, like raising the cap on foreign investment in insurance.

"I think the signals are all there that this is a government which is reform oriented," Prime Minister Manmohan Singh told state-run Doordarshan TV. "In totality if these promises are converted into solid acts of parliament, they will provide a boost to capital market and corporate sentiments all round."

Chandan Mitra, a lawmaker from the main opposition Bharatiya Janata party, said it was "a disappointing and unimaginative budget." India's deficit has fallen thanks to one-time windfall income from telecom spectrum auctions, rather than substantive economic change, he said.

India's benchmark Sensex stock index closed up 0.7 percent.