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O 071412Z JUL 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7329
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RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
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RUEHRC/DEPT OF AGRICULTURE WASHDC IMMEDIATE
RHEBAAA/DEPT OF ENERGY WASHDC IMMEDIATE
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RUCNDT/USMISSION USUN NEW YORK 8281
RUEHGV/USMISSION GENEVA 8467
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INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS SECTION 01 OF 05 NEW DELHI 001401 
 
STATE FOR SCA/INS JASHWORTH AND SCA/RA MURENA 
USDOC FOR 4530/ITA/MAC/OSA/LDROKER/ASTERN 
DEPT PASS TO USTR FOR SOUTH ASIA - CLILIENFELD/AADLER 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA - MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
DEPT OF ENERGY FOR TOM CUTLER, DCOLUMBO, MGINSBERG 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EAGR EPET PREL PGOV IN
SUBJECT: THE NEW BUDGET INVESTS IN RURAL INDIA, BUT POSTPONES FISCAL 
CONSOLIDATION 
 
REF: NEW DELHI 001237 
 
¶1.  (SBU) Summary.  Finance Minister Pranab Mukherjee presented a 
rural-oriented 2009-2010 central government budget on July 6 which 
many say reflect his style: pragmatic, not flashy, and indifferent 
to market expectations.  Indeed, the initial reaction of many to the 
budget was one of disappointment for not laying out a reform 
roadmap, especially in disinvestment and FDI.  Dashed expectations 
aside, the budget did sketch out realistic growth and revenue 
projections and mainly responsible budget allocations.  The 
government had to boost spending on government salaries, per the Pay 
Commission, and spend more on interest payments for the oil and 
fertilizer bonds it issued over the last three years.  Where the 
government had discretion to spend, it focused predominantly on 
increasing funding for the National Rural Employment Guarantee 
Program and rural and urban infrastructure.  The allocations 
represent a desire to sustain rural consumer spending in the short 
term while the economy continues to recover from the global crisis, 
while also laying the groundwork for long-term growth and 
productivity increases through better roads, electricity, and 
housing. 
 
¶2.  (SBU) Summary continued.  On the revenue side, the Finance 
Minister proposed minimal personal income tax cuts, which have been 
offset by a modest expansion of the service tax net and a higher 
minimum alternative tax for large corporations.  The central 
government's fiscal deficit is projected to hit an 18-year high of 
6.8% of GDP, rising from 6% in the fiscal year just ended March 31. 
The higher deficit will require more market borrowing, which could 
push up interest rates, or lead to monetizing some of the debt, 
essentially printing additional currency, which would expand the 
money supply and fuel inflationary pressures.  Other economists also 
worried that the higher deficit might endanger India's sovereign 
debt rating, but a Standard & Poor's spokesperson commented that the 
deficit was within its expectations, suggesting India's investment 
grade rating is safe for now.  The Finance Minister's budget speech 
also committed to introducing the national goods and service tax 
(GST) by April 2010, submitting a draft new income tax code in 45 
days, and restructuring the fertilizer subsidy away from producers 
to consumers, namely farmers who often receive only a fraction of 
the intended benefit.  There is plenty of reform to take on in the 
budget, when much of the reform action will take place outside the 
Ministry of Finance anyway.  End summary. 
 
Budget 2009-10 
------------- 
 
¶3.  (U) In a speech to Parliament , Finance Minister Pranab 
Mukherjee unveiled the central government's budget on July 6 for the 
Indian Fiscal Year (IFY) 2009-10, which began on April 1.  The 
budget assumes a nominal GDP growth of 10% for IFY 2009-10, 12.4% in 
IFY 2010-11 and 13% in IFY 2011-12.  Real GDP in this scenario for 
IFY 2009-10 would be around 6.5%, with an assumption of a normal 
monsoon.  The budget focuses on addressing three challenges: 
returning to the higher growth trajectory of 9%, deepening and 
broadening the agenda for inclusive development, and improving the 
delivery and monitoring mechanisms.  The budget's thrust is on 
infrastructure, rural development and export oriented sectors, while 
offering marginal relief to taxpayers to spur consumer spending. 
 
Focus on Infrastructure Development 
---------------------- 
 
¶4.  (U) Minister Mukherjee in his budget speech told Parliament that 
he intended to increase India's infrastructure spending to 9% of GDP 
by 2014.  In this context, he proposed spending significantly higher 
amounts to build urban and rural infrastructure, including highways, 
irrigation projects, rural housing, electrification and roads.  The 
Indian Infrastructure Finance Co. Ltd. (IIFCL) will refinance 60% of 
commercial bank loans made to public-private partnership (PPP) 
projects, which  could catalyze investment up to Rs 1 trillion 
(roughly $21 billion).  The Budget allocates Rs 129 billion ($2.7 
billion) for urban infrastructure, 87% higher than a year ago, and 
provides Rs 40 billion (about $8.3 billion) for housing and basic 
 
NEW DELHI 00001401  002 OF 005 
 
 
amenities to the urban poor.  Mukherjee also proposes increased 
spending for national highway development program by 23% over IFY 
2008-09 to reach $2.8 billion (Rs. 136 billion). 
 
Social Programs Get Boost 
------------------------- 
 
¶5.  (U) After infrastructure, the budget provides greater 
allocations to the flagship programs which have done well.  The 
National Rural Employment Guarantee Scheme (NREGS) which guarantees 
100 days of work to every rural household has been pledged an 
allocation of Rs. 391 billion ($8 billion) in IFY 2009-10, an 
increase of 30% over the revised estimates of IFY 2008-09.  Other 
programs that will create rural employment and spur demand in the 
country include the Bharat Nirman rural infrastructure program, 
which had its overall allocation raised by 45%, and its component 
schemes such as the Acceleration Irrigation Benefit Program and 
Indira Niwas Yojana, a rural housing scheme, increased by 75% and 
27% respectively compared to last year.  (Note: The government has 
not provided revised IFY 2008-09 estimates for the flagship schemes, 
except NREGS.  Instead, it has compared spending levels for the new 
budget to the proposals made in last year's budget, which at the 
time grossly underestimated spending.  Such comparison creates a 
larger apparent increase in spending.  End note.)  The rural road 
component of Bharat Nirman also proposes to ensure full 
farm-to-market connectivity by upgrading more than 100,000 miles 
worth of existing small roads, with an investment of Rs 480 billion 
($10 billion).  The Pradhan Mantri Gram Sadak Yojana - a separate 
rural roads program - is slated to receive an increase of 59% to Rs. 
120 billion ($2.5 billion).  Mukherjee has also promised a 40% hike 
in the health insurance scheme for people below the poverty line and 
increased money for the Integrated Child Development Scheme and 
female literacy.  The Rajiv Gandhi Grameen Vidyutikaran Yojana 
(RGGVY) program for rural electrification has seen its allocation 
increased by 27% to Rs. 70 billion ($1.5 billion).  Spending on 
family and health welfare has gone up by 22% from Rs 173 billion 
($3.6 billion) last year to Rs 211 billion ($4.4 billion).  The 
government's proposed expenditure on education has increased by 11% 
from Rs 260 billion ($5.4 billion) last year to Rs 291 billion ($6 
billion). 
 
¶6.  (U) The Finance Minister also reiterated the Congress election 
campaign promise to enact a National Food Security Act to ensure 25 
kilograms of rice or wheat per month at Rs. 3 per kg to every family 
living below the poverty line in rural or urban areas.  A draft Food 
Security Bill will be put on the website of the Department of Food 
and Public Distribution for public debate.  No allocation has been 
made for this expenditure, which the Prime Minister explained in an 
interview was because the drafting and passage of the Act, along 
with identifying the targeted households, would take more than a 
year. 
 
Expenditures Rise 
------------------ 
 
¶7.  (U) Total spending for IFY 2009-10 is estimated at Rs 10,208 
billion ($213 billion), an increase of 13.3% over last year's 
revised spending figures.  Plan (developmental) expenditure gets a 
major boost in the Budget, reflecting the government's commitment to 
accelerating the growth process.  At Rs 3251 billion (approximately 
$68 billion), the Plan expenditure will rise by 14.9%, while 
non-plan expenditure is expected to rise by 12.6%.  While higher 
plan spending is due to social sector/infrastructure spending, 
non-plan expenditure factors in implementation of the Pay Commission 
recommendations (also reflected as an increase in defense spending) 
and interest payments.  The net borrowing program has increased from 
Rs 3,086 billion to Rs 3,980 billion, a 29% increase to roughly $83 
billion.  However, Finance Secretary Ashok Chawla clarified after 
the Budget Speech that, of the proposed government borrowing, only 
half would be raised from the market.  The rest would be picked up 
by India's central bank, the Reserve Bank of India, implying a 
return to monetization of the deficit (read printing currency). 
 
¶8.  (U) The budget also provides incentives for the export sector. 
 
NEW DELHI 00001401  003 OF 005 
 
 
The Budget provides a special fund of Rs. 40 billion ($800 million 
approximately) for banks and state finance corporations to 
facilitate lending to micro, small, and medium enterprises.  The 
allocation for the Market Development Assistance Scheme for 
exporters has been increased by 148%.  The existing 2% interest 
subsidy on pre-shipment credit to employment-oriented export sector 
has been extended until the end of this fiscal year (March 31, 
2010). 
 
Direct Taxes 
--------- 
 
¶9.  (U) The Finance Minister has proposed modest increases in the 
personal tax exemptions by Rs. 10,000 ($208) and Rs. 15,000 
($312)for senior citizens (above 65 years).  Women will receive an 
additional relief of Rs 10,000.  The 10% surcharge on personal 
income tax has been proposed to be removed and the fringe benefit 
tax (FBT), which was imposing considerable compliance burden on 
companies, was also abolished.  Removal of the FBT and the surcharge 
on personal income tax will cost the exchequer about Rs 100 billion 
($2 billion)and Rs 50-60 billion (roughly $1-1.25 billion) 
respectively in the current year, which will be offset by increasing 
a tax on corporations and increasing the service tax net.  Mukherjee 
also promised to simplify tax returns by coming out with a new 
direct tax code within 45 days for discussion to introduce a bill in 
Parliament in the winter session. 
 
¶10.  (U) Disappointing corporate India, Finance Minister Mukherjee 
made no major changes in corporate tax rates in IFY 2009-10. 
However, he did away with the Commodities Transaction Tax which was 
introduced last year, but not notified, so as to encourage trading 
in commodity markets.  In the quest for greater equity, the budget 
increased the rate of the minimum alternate tax (MAT) to 15% from 
10% of booked profits.  Mukherjee also pledged that an alternative 
dispute resolution mechanism would be created within the Income Tax 
Department for the resolution of transfer pricing disputes. 
Further, the Central Board of Direct Taxes will be empowered to 
formulate 'safe harbor' rules for international transactions.  The 
budget also proposes to exempt all trading in equity shares and 
derivatives by the National Pension System Trust from the Securities 
Transaction Tax (STT) to provide the necessary fiscal support to the 
much-needed social security system. 
Indirect Taxes 
-------------- 
 
¶11.  (U) In the run-up to a uniform central goods and service tax 
(GST) rate of 8% next fiscal year, the excise duty has been doubled 
to 8% on many items except for bakery items, drugs, pharmaceuticals, 
medical equipment, and rural consumer goods.  While the 2% excise 
tax on branded jewelry has been eliminated, it has been cut to 8% 
from 20% on petrol-driven trucks.  Specific component of excise duty 
applicable to large cars/utility vehicles of engine capacity 2000 cc 
and above has been reduced from Rs. 20,000/ vehicle to Rs. 15,000/ 
vehicle.  High speed diesel blended with up to 20% bio-diesel will 
be exempted from excise duties.  Widening service tax coverage, a 
10% service tax will now be applied to transport of goods by rail, 
coastal cargo and goods through inland water including national 
waterways; cosmetic and plastic surgery services; and legal 
consultancy services.  Furthermore, shipment of goods through third 
party road transporters that are currently covered under the service 
tax regime will be exempted from service tax. 
 
¶12.  (U) Customs duties were tinkered with, although the Finance 
Minister chose to delay additional broad duty reductions towards 
ASEAN levels that the government had pursued in recent years. 
Additional raw material/input items(for sports goods, leather, 
textiles and footwear industry, all hit hard by the global slowdown) 
have been exempted from custom duty.  The customs duty on rock 
phosphate will be reduced to 2% from 5%.  The 5% customs duty on 
unprocessed corals has been totally withdrawn.  The customs duty on 
permanent magnets used in wind operated electricity generators and 
mechanical harvesters for coffee plantations have been reduced to 5% 
from 7.5%.  While the customs duty on bio-diesel has been slashed to 
2.5% from 7.5%, it has been doubled for gold and silver. 
 
NEW DELHI 00001401  004 OF 005 
 
 
 
¶13.  (U) On technology products, set-top boxes for televisions will 
now attract a customs duty of 5% (earlier zero duty) but the customs 
duty on LCD panels is halved to 5%.  In response to demands from 
mobile phone manufacturers, the budget announced exemption from the 
4% special countervailing duty (CVD) on imports of parts and 
accessories for one year.  On packaged or canned software, a CVD 
exemption will be applicable to partial value representing transfer 
of the right to use the software.  In the health sector, the basic 
custom duty has been halved to 5% on influenza vaccine and nine 
specified life saving drugs used for the treatment of breast cancer, 
hepatitis-B, rheumatic arthritis, etc. and on bulk drugs used for 
the manufacture of such drugs; these drugs will also be exempt from 
CVD.  The basic customs duty has also been reduced from 7.5% to 5% 
on two specified life saving devices used in treatment of heart 
conditions with full CVD exemption. 
 
Fiscal Deficit Rises 
-------------------- 
 
¶14.  (U) Increased spending on infrastructure and rural programs 
coupled with the required increase in salaries and interest payments 
has generated a fiscal deficit of 6.8% of GDP, compared to 6% of GDP 
in 2008-09.  The measures taken by the government to counter the 
effects of the global meltdown slowdown on the Indian economy have 
resulted in shortfall in revenues and substantial increases in 
government expenditures, leading to a temporary deferment of the 
attainment of the Fiscal Responsibility and the Budget Management 
Act (FRBM)targets with respect to both. (Note: The 13th Finance 
Commission has been mandated to review the FRBM roadmap and its 
report will be released in October 2009.  End note.) 
 
Market Watchers and Business Community React 
--------------------------------------------- 
 
¶15.  (SBU) Market investors had been looking to the budget to lay 
out an explicit reform roadmap (reftel) and were deeply disappointed 
by the Finance Minister.  The Sensex market closed down 6% on July 
6, the single largest drop on a Budget day, with market participants 
bemoaning the lack of divestment specifics or other reform measures. 
 Dr. Brinda Jagirdar, an economist at State Bank of India, told our 
Mumbai consulate that the budget did not live up to the hype created 
during the pre-budget period.  She said the Finance Minister 
consulted with groups from every sector, hearing their wish list and 
making them feel important, but did not incorporate these 
expectations in the budget.  She quickly added, however, that even 
though issues of disinvestment, FDI were not included in the budget, 
it did not mean that these reforms would not be carried on.  Dr. 
Bandi Ram Prasad, President of FT Knowledge Management Co., opined 
that the market was focusing on one or two areas while missing that 
the budget had maintained its conventional priorities.  The measures 
in infrastructure were consistent with growth objectives.  He also 
pointed out that the budget reflected Mukherjee's "old school style 
without any sparks".  The budget was supposed to be a document that 
indicated financial allocation for a year but in recent years, it 
had become over-glamorized, he added. 
 
Comment 
--------- 
 
¶16.  (SBU) The ruling United Progressive Alliance's (UPA) budget 
elicited strong opinions across the board and the wide range of 
reaction stems from the fact that there is still a lack of consensus 
about whether the economy still needs stimulus, and whether that 
need is worth the additional government borrowing, which risks 
higher inflation and or interest rates.  In some ways, these 
divergent views reflect the wider uncertainty in the global economy 
today, as the whole world grapples with the biggest economic 
downturn since the Great Depression.  Given these challenges and 
constraints, Finance Minister Mukherjee has delivered an overall 
no-frills, responsible budget that focuses on keeping economic 
growth above 7% in the short-term by improving consumer purchasing 
power, while building better infrastructure for medium-term growth. 
The higher fiscal deficit is a concern and the government has 
 
NEW DELHI 00001401  005 OF 005 
 
 
currently punted to the scheduled October report of the Finance 
Commission to develop a medium term deficit reduction plan. 
However, a somewhat lower deficit is in the cards for next year 
because the government salary increases would have been implemented, 
which account for roughly one-fourth of the financing gap this year. 
 Further deficit reductions can come from more decontrol of refined 
petroleum product retail prices and from restructuring the 
fertilizer subsidy.  These, like the other reforms that have been 
suggested in the Economic Survey, require political consensus.  And 
a budget cannot deliver that. 
 
BURLEIGH