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Govt trying to restore faith with tax breaks

Surojit Gupta in New Delhi

Finance Minister Jaswant Singh's debut economic policy statement aims to boost investor confidence and restore faith in capital markets, which have been rocked by a string of scandals, analysts said on Thursday.

Singh announced on Wednesday a series of personal and corporate tax exemptions and unveiled a new tax-free bond scheme for citizens to invest their savings.

Some analysts said the reforms seemed to be an attempt to win support from the middle class -- the main support base of the Bharatiya Janata Party, which heads the ruling central coalition government -- ahead of state elections over the next 12 months and a general election in 2004.

Others said the government's latest downward revision of projected growth was still too high given a worsening drought.

"The packaging of the effort is to give tax relief and boost market confidence," said Shashank Bhide, chief economist with the National Council For Applied Economic Research, an independent economic think tank.

"The major positive impact would be on the capital market."

The Bombay stock index fell 0.4 per cent while longer-dated bond prices rose sharply after the news of the tax-free bond which was seen as driving investors to bonds.

Singh's predecessor, Yashwant Sinha, now external affairs minister, had been accused of alienating the middle class by imposing more taxes and cutting interest rates on small savings schemes popular with the salaried class and pensioners.

The new finance minister, who swapped jobs with Sinha in a Cabinet reshuffle on July 1, also announced measures to back the Unit Trust of India, the country's largest mutual fund manager, which has been facing redemption pressure from investors.

Singh's plans included measures to ensure transparency and full disclosure in corporate accounts and streamline audits.

Indian markets have been hit by various scandals in the past two years, involving allegations of insider trading and price rigging, which eroded confidence and led to a fall in market prices.

The market slump hit UTI, which was long regarded as a safe haven for investors, and prompted it to freeze redemptions in its flagship US-64 scheme.

POPULISM?

"Given the constraints, the finance minister has moved in the right direction. He has shown that there is a shift in policy which will now be guided by the larger interest of people," said Saumitra Chaudhuri, economic adviser with credit rating agency ICRA.

He said the government's new estimate of 5.5-per cent GDP growth for fiscal 2002-2003 took account of a drought which is gripping the country and threatening agricultural output.

Some analysts said Singh had tried to be populist at the risk of taking tough steps to control the yawning fiscal deficit.

"I would say this is a populist step and precursor of more populist steps. We need very hard steps to be taken by the finance minister in curbing the fiscal deficit and spending of the government," said M R Madhavan, head of research at Bank of America.

Last year's deep industrial slowdown led to a sharp decline in tax receipts, widening India's fiscal deficit to 5.7 per cent of GDP. In 2002-03 the government has set a target of keeping the deficit at 5.3 per cent of GDP.

Global rating agencies say India's fiscal deficit may threaten its sovereign rating, which is already at junk-bond levels.

Bank of America's Madhavan said even the government's downwardly revised GDP growth estimates were optimistic.

"I think the government's estimate of 5.5 per cent is very optimistic, as agriculture will decline this year because of the drought. We would be lucky if we cross 5.0 per cent this year," he said.

Several research houses have cut India's growth prospects for the current financial year which began in April. In the latest downgrade on Wednesday, Salomon Smith Barney sharply lowered India's economic growth estimate to 4.8 per cent from 5.5 per cent.

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