India ramped up spending for this fiscal year to support a fragile economic recovery, spooking stock and bond markets with plans for record borrowing and the biggest budget deficit in 16 years. Investors had hoped the new government would use a strong re-election mandate to push through pro-market reforms, but the budget it unveiled lacked major policy changes and focused on increased borrowing and spending to aid farmers and the poor. Stocks tumbled nearly 6 percent, bond yields spiked and the rupee fell 1.4 percent after Finance Minister Pranab Mukherjee, sticking to the ruling Congress party's theme of “inclusive growth”, said the fiscal deficit for the year ending March 2010 would increase to 6.8 percent of gross domestic product (GDP). The stocks selldown was the biggest in six months. With the developed world mired in recession, big emerging economies led by China -- on track for 8 percent growth this year -- and India are expected to help drive worldwide recovery. Both economies have been fuelled by stimulus spending to spur domestic demand. Investors had expected India's fiscal deficit to grow to up to 6.5 percent, from 6.2 percent in the previous year. However, analysts said the hefty borrowing plan threatens to drive up the cost of credit and choke off economic growth. The first budget of Prime Minister Manmohan Singh's new administration was seen as a roadmap for how he will govern for the next five years after his Congress party-led coalition was re-elected by an unexpectedly decisive margin in May. “While the thrust on agriculture, infrastructure, etc., augurs well from a long-term growth perspective, the fiscal profligacy is quite obvious in the near term,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai. Budget documents showed the government's gross market borrowing in the current fiscal year would total a record 4.51 trillion rupees ($93.4 billion), 14 percent higher than a Reuters poll forecast and about a quarter higher than the borrowing target cited in an interim budget in February. Mukherjee said overall spending would increase by 36 percent this year, but also called for a return to fiscal responsibility targets “at the earliest.” His budget report said the fiscal deficit target would be closer to 3 percent of GDP in the year that ends in March 2012, assuming a global economic recovery. Market watchers expressed concern that Mukherjee did not unveil significant reforms, provide details on plans to sell stakes in state-controlled companies or relax foreign investment limits. “It is really a big disappointment,” said Madhavi Vora, managing director, ULJK Securities. Mukherjee said states should remove bottlenecks for infrastructure projects, and outlined plans for more flexible financing for infrastructure and development of long-distance gas pipelines. Inadequate power supplies and transport links have long choked India's growth. Unconstrained by its previous alliance with leftist parties, Singh's new government had a freer hand to implement economic liberalisation measures to drive growth, but instead focused its budget on rural development and support of social programmes. Despite its recent vibrant growth, grinding poverty persists in India. A 2007 government study said 77 percent of Indians, or 836 million people, lived on less than 50 cents a day. India's fiscal deficit ballooned to 6.2 percent in the financial year that ended in March. – AgenciesBUDGET HIGHLIGHTS• Gross market borrowing plan raised to Rs4.51 trillion • Fiscal deficit likely to be 6.8% of GDP and revenue deficit 4.8%. • Financial year non-plan spending to be Rs6.96 trillion Aim to raise Rs1.4 trillion in non-tax revenue • No change in corporate tax or to excise, import and services tax structure. • To raise minimum alternate tax rate to 15% from current 10%. • To scrap commodity transaction tax and abolish tax imposed on fringe benefits. • To release new direct tax code in 45 days. • To levy uniform tax of Rs15,000 on vehicles with engine capacity of more than 2,000 cc. • To give more incentives to exporters. Some labor-intensive sectors such as textiles and leather, which largely cater to overseas customers, were offered some incentives. __
