India taps 'super rich' in budget

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Story highlights

  • The budget outlined plans for India to spend 17 per cent more on education and vocational training
  • Finance minister Chidambaram said next year's fiscal deficit would be kept to 4.8 per cent of GDP
  • The budget has also sought to revive India's slowing property market, especially at the lower end

India plans to increase spending on capital investment and large-scale social programmes by 29 per cent next year, while imposing a one-year 10 per cent tax surcharge on the "super-rich".

In presenting the budget on Thursday, Palaniappan Chidambaram, the country's finance minister, said India had to revive growth closer to the 8 per cent recorded before the global economic crisis, which has seen India's economy sharply decelerating. Growth is expected to be about 5 per cent this year.

"Achieving high growth is not a novelty or beyond our capacity," he said. "We have done it before and we can do it again."

Mr Chidambaram pledged the fiscal deficit for next year would be kept to 4.8 per cent of GDP. But he said the government had to focus on uplifting disadvantaged groups -- including lower castes, minorities and women -- to ensure growth was sustainable in the long run.

"Many sections of the people will be left behind if we do not pay special attention to them," he said. "There is a compelling moral case for equity but it is also necessary if there is to be sustained growth."

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The Bombay Stock Exchange fell nearly 300 points, to a 3-month low, after the budget was unveiled.

The budget outlined plans for India to spend 17 per cent more on education and vocational training; 22 per cent more on agriculture, and 24 per cent more on health. It also sets aside an additional $1.8bn for food subsidies as part of the Congress-led government's scheme to ensure food security, and battle pervasive malnutrition, especially in remote rural areas.

This additional revenue would come in part from a 10 per cent surcharge on the 42,800 Indian taxpayers who reported taxable income of more than Rs10m ($180,000) last year. He said the tax surcharge, which is also applicable to companies, would apply for just one year.

He said the government would increase import duties on luxury cars, yachts and motorbikes: the import duty on luxury cars will rise to 100 per cent, up from 75 per cent.

"When I need to raise resources, who can I go to except those who are relatively well off in society," Mr Chidambaram said, likening the additional surcharge to a charitable donation that he said he believed rich Indians would pay "cheerfully".

Companies earning more than Rs5m would also be asked to pay an additional 5 per cent tax surcharge.

The finance minister acknowledged the importance of foreign investors and pledged to try to assuage their fears about the threat of retrospective taxation. "Investment is an act of faith," he said. "We will improve communication of our policies to remove any apprehension or mistrust in the minds of investors. Doing business in India must be seen as easy, friendly and mutually beneficial."

But investors may be disappointed he did not offer any specific proposals for repealing retrospective tax laws imposed last year.

The budget has also sought to revive India's slowing property market, especially at the lower end. In the next year, families taking a bank loan of up to Rs2.5m to purchase their first home would be entitled to a special Rs100,000 tax deduction, a measure that he said would promote home ownership, while "giving a fillip" to industries such as steel and cement and creating more new jobs for construction workers.

Mr Chidambaram was installed as finance minister in August, and has been aggressive in trying to control the fiscal deficit. Before he took charge, India appeared headed for a fiscal deficit of 5.8 per cent of GDP for the current financial year ending March 31.

However, Mr Chidambaram has forced ministries to cut their expenditure by 10 per cent, and said the fiscal deficit for the current year would come in at 5.2 per cent.