By Raymond Zhong and Anant Vijay Kala
NEW DELHI--India's new government chose incremental change over
a major revamp for the country's ailing economy, saying Thursday it
plans to simplify the tax system, make subsidy programs more
efficient and raise the limit on foreign investment in two
industries.
Presenting the national budget to Parliament, Finance Minister
Arun Jaitley said the cap on foreign holdings in Indian defense and
insurance companies would rise to 49% from 26%. But he gave mixed
signals on retroactive taxation that has hit major foreign firms
with huge liabilities. and contributed to the country's image as a
sometimes-hostile place to do business.
Outlining the budget's 18 trillion rupees, or $300 billion, in
total spending, Mr. Jaitley ticked off plans big and small--from
spurring infrastructure investment and updating financial
regulations to funding a 60-story statue of Indian founding father
Vallabhbhai Patel and protecting women on mass transit.
He said the budget and policies being rolled out by the new
administration were "only the beginning of a journey" toward
reviving economic growth, reducing poverty and expanding the middle
class. "India unhesitatingly desires to grow," he said.
He said it would be a few years before growth in economic output
hit 7% to 8%--a level last seen four years ago. In the year ended
March 31, Indian gross domestic product increased 4.7%.
The budget was widely seen as an important statement of intent
by the government of Prime Minister Narendra Modi's Bharatiya
Janata Party, which came to power this year after pledging to shake
up the government and deliver the economic development sought by
frustrated Indian voters.
The budget's measured approach appeared to be a harbinger of
tailored efforts--rather than policy overhauls--to improve
government efficiency and make the economy more open.
"It was really a grab bag of different policies with something
in there for everybody," said Frederic Neumann, joint head of Asian
economic research for bank HSBC. "All in all, an encouraging
budget, but not really something that is a complete
game-changer."
Investor reaction was mixed. The Bombay Stock Exchange's
benchmark index saw large swings as Mr. Jaitley spoke on Thursday
morning, falling by as much as 1.3% in intraday trading before
rebounding by the speech's end. The index ended the day down
0.3%.
Despite planned new spending, Mr. Jaitley said the government
would aim to keep the budget deficit to 4.1% of GDP for the year
ending March 31, a target set by the previous, left-leaning
government led by the Congress party. He said achieving the number
would be "daunting." He also pledged to shrink the deficit to 3.6%
of GDP in the next fiscal year.
Some political analysts had hoped that Mr. Jaitley, an erudite
former Supreme Court lawyer, would use his inaugural budget address
to redefine the government's approach to economic management. But
his speech, which lasted more than two hours and 15 minutes, at
times read like a laundry list of spending and revenue measures
rather than a statement of a new vision for India.
In general, the first budget of the Modi administration stuck to
the middle road. Mr. Jaitley, who inveighed on the campaign trail
against the "tax terrorism" of his predecessors, didn't suggest a
repeal of a retroactive tax law used against Vodafone Group PLC and
Nokia Corp., which has drawn fire from foreign investors.
Instead, he said the Modi government would limit retroactive tax
demands on businesses. Any new cases arising from the previous
government's tax changes would be reviewed by a committee. "The
sovereign right of the government to undertake retrospective
legislation is unquestionable," he said, but added the Modi
government wouldn't "ordinarily" pass such laws.
The U.S.-India Business Council, an advocacy group, said that
"any retroactive taxation is harmful to India's business climate."
Firms are "eager for further positive clarifications on this
matter," the council said. Vodafone said Thursday it doesn't expect
relief from the Indian government and will continue with ongoing
arbitration.
To simplify the welter of state and federal sales taxes imposed
on domestic and foreign businesses, Mr. Jaitley said he would push
for passage of a uniform, countrywide goods-and-services tax. Such
a levy, economists say, is essential for improving tax collection
and making it easier for firms to do business across state
lines.
Mr. Jaitley said he hoped to complete negotiations on the tax,
which many state governments don't support, by the end of this
year.
The finance minister emphasized that programs to alleviate
poverty would remain a focus of the Modi administration. Funding
for a rural-employment program, a flagship policy of the previous
government, would be maintained, but he said it would be aimed at
building lasting public works. India's extensive subsidy programs
for the poor would be "more targeted," he said, without offering
details. Analysts had been hoping for concrete plans to trim
subsidies, which total 2.5 trillion rupees, or 14% of all
expenditure, in the new budget.
Mr. Jaitley stressed Mr. Modi's ambition to close the gap
between urban and rural areas, saying the government would focus on
putting toilets in elementary schools and expanding rural
electrification.
"This doesn't look very different" from the previous
government's budgets, said Madan Sabnavis, chief economist at CARE
Ratings, a Mumbai-based credit-ratings firm. "The names of the
schemes have changed, that's all."
Prasanta Sahu, Rajesh Roy and Niharika Mandhana contributed to
this article.
Write to Anant Vijay Kala at anant.kala@wsj.com