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Mon 25 Feb 2008 10:20 AM

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Fighting poverty focus of India budget

In last budget before next general election, gov't looking to help debt-hit farmers, economists say.

India's centre-left government will focus on fighting poverty and helping debt-hit farmers when it delivers this week what could be its last budget before the next general election, economists have said.

Ruling Congress party chief Sonia Gandhi gave a flavour of Friday's budget when she said last week Finance Minister Palaniappan Chidambaram would "keep the common man's difficulties", especially those of farmers, in mind.

"This is likely to be the government's last full-fledged budget before the general elections," expected to be held within 12 to 15 months, Morgan Stanley economist Chetan Ahya said.

The budget for the next fiscal year to March 2009 "will be aimed at pleasing the lower-income segment of the population, which, during recent months, has been suffering from the rising cost of living", Ahya said.

Congress, which owes its upset 2004 general election win to support from India's poor masses, is already feeling the heat over inflation, which has been blamed for the party's drubbing in several state polls.

Chidambaram, a Harvard-educated lawyer-turned-politician, is expected to stress measures to wrestle down prices and keep Asia's third-largest economy on track for strong growth.

Inflation is running at a six-month high of 4.35% but many economists believe the official figures understate the real rise in consumer prices.

Social spending will also be high on the agenda to help the poor, who represent over a quarter of India's 1.1 billion people and who have been largely bypassed by the economic boom, led by India's flagship outsourcing industry.

The government is expected to boost education and health spending, and increase allocations for rural infrastructure, economist say.

Thousands of villages still lack roads and access to medical care, schools, clean water and sanitation.

"India should not claim to be a superpower before it provides tapped water and toilets to its citizens," said social activist Ela Bhatt, writing in the Times of India.

The statistics office forecasts the economy will expand by 8.7% in this fiscal year, second only to China's growth.

But that's slower than last year's 9.6% growth due to a slew of interest rate hikes aimed at checking prices that has dented consumer demand and the rupee's steep climb against the dollar which has hit exports.

Economists expect the monetary tightening and a global downturn to slow the economy further next year - bad news for India, which is said to need double-digit growth to lift hundreds of millions from poverty.

Chidambaram could increase tax breaks on personal income and cut duties on consumer goods to spur spending and lift growth, economists say.

He also is expected to try to boost farm growth, seen slowing to 2.6% this fiscal year from 3.8% the previous year.

Economists believe he will give financial help to despairing farmers - some have been committing suicide because of heavy debts - and announce measures to hike yields, which would ease food inflation.

The farm sector is crucial as it provides a living for two-thirds of India's population.

Chidambaram's budget will be "populist", forecast JP Morgan economist Rajeev Malik, but the minister will have to walk a fiscal tightrope to do it.

Strong tax revenues would appear to give the government headroom to keep its electoral pledge of putting the "common man" and rural India atop its agenda, while the headline fiscal deficit is expected to improve to 3.2% of gross domestic product (GDP) this year from 3.7% the previous year.

But off-budget items such as hefty subsidies for soaring oil prices is seen pushing the underlying deficit to 5.4% of GDP - giving less space in which to manoeuvre.

Chidambaram "faces a more difficult balancing act in the budget than might appear", HSBC economist Robert Prior-Wandesforde warned.

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