“I consider myself the minister for investment,” India’s new finance minister, Palaniappan Chidambaram, told the media soon after he took charge. Given the constraints of a left-leaning coalition, Mr Chidambaram made a bold move in the budget, raising the foreign direct investment (FDI) limit from 49% to 74% in telecoms, from 40% to 49% in civil aviation and from 26% to 49% in insurance. Long-term capital gains tax on securities transactions is abolished and foreign portfolio investors have been promised hassle-free process for registration in India. The limit for foreign portfolio investment in rupee debt is raised from $1bn to $1.75bn.
Foreign investors are also pleased with the emphasis on fiscal prudence. The fiscal deficit target for this fiscal year is 4.4% of GDP, and Mr Chidambaram has promised to abolish the revenue deficit in five years. Higher investment in agriculture, social services and restructuring of the public sector will be financed by a moderate increase in taxes.
Mr Chidambaram’s first stint as finance minister in the United Front government in 1996 established his pro-reform credentials. He cut taxes, introduced the first bill in parliament to open up the insurance sector to private investment, installed professionals on the boards of several state financial institutions and allowed more state banks to list on the stock market. Many believe that this lawyer, who has an MBA from Harvard University, and the prime minister make a great team.
The Congress-led government’s mandate is to keep annual economic growth at 7%-8%, and that is a mandate for reform, Mr Chidambaram told the media. Asked how he intends to bring India’s worrying fiscal deficit down, he quipped: “Once growth happens, everything else will fall into place.”
