Capital flows to India rise, raising absorptive concerns

India has recorded a growth rate of over 8 percent in 12 successive quarters from January 1, 2005 to December 31, 2007 with services and manufacturing being the drives of growth, estimated to grow at 10.7 percent and 9.4 percent respectively. For the past three years, India's Gross Domestic Product (GDP) has reached an 'unprecedented average growth of 8.8 percent' and according to estimates for the current year, the growth rate will be 8.7 percent although India's Finance Minister, P. Chidambaran said he is confident in maintaining the average 8.8 percent.

He made these comments in presenting India;s 2008-09 budget this week. Chidambaram said that 2007-08 has been the most challenging of the last four years where the outlook for the global economy was benign. Agriculture struck a disappointing note and world prices of crude oil, commodities and food grains have risen sharply in the period April 2007 to January 2008. The prices of wheat and rice have increased in the world by 88 percent and 15 percent respectively. Chidambaram said all these trends are inflationary and there is pressure on domestic prices, especially on the prices of food articles. Consequently, the management of the supply side of food articles will be the most crucial task in the ensuing year.

Given the increasing trade with India, Sri Lankan exporters and traders are so closely following Indian budget policy
Chidambaram said that keeping inflation under check 'is one of the cornerstones of our policy.' Downside risks have increased worldwide, requiring vigilance and preparedness to make swift policy adjustments to achieve the goal of growth with price stability.

He further said that India has witnessed capital inflows that are far in excess of the current account deficit, posing a challenge to monetary management. 'The solution lies in increasing the absorptive capacity of the economy in the medium term. In the short term, it is our responsibility to manage the flows more actively.'

Addressing the buoyancy in tax revenues, especially in direct taxes, Chidambaram said moderate and stable tax rates coupled with a tax administration that shows no fear or favour will bring high revenues to the exchequer. The tax to GDP ratio of 2007-08 was 12.5 percent, an increase from 9.2 percent in 2003-04. He said high growth rates have helped but above all, information systems and technology have helped most.

For 2008-09, customs duty on Project Imports will be reduced from 7.5 percent to 5 percent. The duty on steel melting scrap and aluminium scrap will also be reduced from 5 percent to nil in order to improve the supply of raw material. On certain specified life saving drugs and on the bulk drugs used for the manufacture of such drugs, customs duty will be reduced from 10 percent to 5 percent as well to totally exempt them from excise duty or countervailing duty.

Chidambaram further proposed the reduction on excise duty on all goods produced in the pharmaceutical sector from 16 percent to 8 percent. Excise duty on buses and their chassis will also be reduced from 16 percent to 12 percent and excise duty on small cars will be reduced from 16 percent to 12 percent. The reduction on hybrid cars will be from 24 percent to the general revised rate of 14 percent. Excise duty on two wheelers and three wheelers will be reduced from 16 percent to 12 percent. The threshold limits of exemption on personal taxes have also been increased.