By Raymond Zhong and Anant Vijay Kala
NEW DELHI--India's new government chose incremental change over
big-bang reform for the country's ailing economy, saying Thursday
it plans to simplify the tax system, make the welfare state more
efficient and allow more foreign investment in two industries.
Presenting the national budget to Parliament, Finance Minister
Arun Jaitley said the cap on foreign holdings allowed in Indian
defense and insurance companies would be raised to 49% from 26%. He
also pledged incentives to spur infrastructure investment and a
host of small development programs.
Mr. Jaitley said the budget and policies being rolled out by the
new administration were "only the beginning of a journey" toward
reviving economic growth, pulling people out of poverty and
expanding the middle class. "India unhesitatingly desires to grow,"
he said.
He predicted that it would be a few years before India's
economic output growth would 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, whose Bharatiya
Janata Party came to power this year after pledging to shake up the
government and deliver the economic development sought by
frustrated Indian voters.
Its measured approach appeared to be a harbinger of tailored
efforts--not barnstorming 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 government 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.
The budget 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. Mr.
Jaitley promised funding for, among other things, improving women's
safety on public transport, promoting hand-woven textiles and
building an enormous statue of Vallabhai Patel, one of India's
founding fathers, in Mr. Modi's home state of Gujarat.
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.
In general, however, the first budget of the Modi administration
stuck to the middle road. Mr. Jaitley, who inveighed on the
campaign trail against the "tax terrorism" practiced by his
predecessors, didn't suggest a repeal of a retrospective 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 any
retrospective tax demands on businesses. He said 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, a business-advocacy group, said
in a statement that "any retrospective 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 taxes imposed on
businesses, Mr. Jaitley said he would push for passage of a
uniform, countrywide goods and services tax. Such a tax, 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 Indian state governments currently don't support, by the
end of this year.
Mr. Jaitley emphasized that programs to alleviate poverty would
remain a focus of Mr. Modi's administration. He said funding for a
rural-employment program--a flagship policy of the previous
government--would be maintained, but said it would be aimed at
building lasting public works.
India's extensive subsidy programs for the poor would also be
"more targeted," he said, without offering details. Analysts had
been hoping for concrete plans for trimming government subsidies,
which will total 2.5 trillion rupees ($42 billion), or 14% of all
expenditure, in the new budget.
Mr. Jaitley also stressed Mr. Modi's ambition to close the gap
between urban and rural areas, saying the government would focus on
constructing 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. "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