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India’s 2010-11 Union Budget seeks to attract additional FDI and boost GDP to 9%

February 26, 2010

Hoping to attract a flood of foreign direct investment to fuel India’s growth projected at 9 percent, Finance Minister Pranab Mukherjee on Friday announced an expenditure heavy union Budget 2010-11. He said the government will spend Rs. 11.09 trillion (US$239 billion) in the next fiscal year and that net market borrowing will be Rs 3.45 trillion (US$74 billion).

India’s GDP which grew 7.2 percent this fiscal is expected to grow 8.5 percent during the next fiscal year, before hitting 9 percent growth in 2011-12. Foreign direct investment rules are also expected to be simplified. India’s fiscal year runs from April-March.

In order to make India a more attractive FDI destination, Mukherjee aims to slash fiscal deficit from 6.9 percent this fiscal to 5.5 percent next fiscal year, to 4.8 percent in 201-12 and 4.1 percent in 2012-13. The budget also aims to rein in inflation which rose almost 15 percent in December 2009 from a year earlier, the most in 11 years.

Additionally, sticking with inclusive growth which will eventually help propel the Indian economy further, New Delhi has specifically increased expenditure on the rural, infrastructure, agriculture, health care and education sectors.

New Delhi has allocated Rs. 223 billion (US$4.8 billion) for health care, Rs 310.36 billion (US$6.7 billion)  for schools, Rs. 12.7 billion (US$ 0.2 billion) on slum rehabilitation, Rs.1.74 trillion (US$ 37 billion) on infrastructure projects, Rs. 198.94 billion (US$ 4.3 billion)  on roads and Rs. 661 billion (US$ 14.3 billion) on the rural sector. The budget increases spending on rural infrastructure by 25 percent and that for road infrastructure by 13 percent. In order to give India’s power sector a fillip, Mr. Mukherjee has also proposed allocating Rs. 51.30 billion (US$ 1.1 billion) to the power sector and investing Rs. 10 billion (US$0.2 billion) in renewable energy.

The government plans to fund its expenditure on these sectors by dis investing public sector units (Rs 35,000 crore (US$7 billion) was raised by the government by way of divesting stake in public sector enterprises this  fiscal), auctioning of 3G spectrum (government expected to earn Rs 360 billion (US$7.7 billion)), competitive bidding for captive coal blocks and from increased tax collections. The minister also promised more banking licenses for the private sector.

On the tax front, spurred by the industrial recovery, Mukherjee has revised income tax slabs (see box, all figures in Indian Rupees) and raised customs and excise duties by 2 percent. According to expectations, base excise tax on non-petroleum products is now 10 percent.
The proposed Goods and services tax (GST) as well as the Direct Tax code will be introduced by April 2011.

Fuel prices have been increased by Re. 1/liter, while cars, TV’s, Air conditioners, microwaves, gold, silver, mobiles accessories,  medical equipment, books, and cigarettes have also become more expensive. The budget proposes the gold import tax to be increased from Rs. 200 to Rs. 300/10 grams.

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