India raised spending on its military by 7.8 percent to 21.3 billion dollars for the next fiscal year starting April, the government said in its budget announcement on Wednesday. India's military has planned a massive upgrade of its mainly 1990s-era weapons systems, mostly from Cold War ally the former Soviet Union and subsequently Russia.
The plans include the purchase of 126 new combat aircraft to replace an ageing fleet of MiG-21s. India's million-plus army, the world's fourth largest, received the lion's share of the funds.
But new arms purchases have fuelled offshore attention with US-based Lockheed-Martin's F-16 competing for the 126 multi-role fighter planes along with US rival Boeing's F-18, the Rafale made by French Dassault, the Eurofighter and the Russian-built MiG-35 and MiG-29.
India said it would use tax revenue generated by a booming economy to raise spending on health, education and its flagging farm sector to improve living conditions for hundreds of millions of the poor.
Fresh from defeat in two state elections on Tuesday that reflected voter anger about rising prices, the ruling Congress party slashed duties on a host of items in its annual budget to control inflation, now just below its highest in two years.
With one eye on more state elections later this year and the other on national polls due in 2009, the government said total spending would rise 21 percent to 6.81 trillion rupees ($154 billion), including higher spending on education, health and a rural jobs guarantee scheme.
"Our human and development indices are low, not because of high growth but because growth is not high enough," Finance Minister Palaniappan Chidambaram told parliament.
"Faster economic growth has given us once again the opportunity to unfurl the sails and catch the wind." The Indian economy, Asia's fourth largest, is expanding at its fastest pace in 18 years and is forecast to grow 9.2 percent in the fiscal year ending on March 31.
The government has made high growth the centrepiece of its agenda to lift a quarter of the billion-plus population out of extreme poverty, although its communist allies said the budget did not go far enough to help farmers and the poor.
The government is relying on rising tax revenue, which Chidambaram said would reach 4.04 trillion rupees in 2007/08, up 16.7 percent, and market borrowing, estimated at a net 1.09 trillion, up from 1.07 trillion in 2006/07.
The rupee fell slightly while the main stock market index ended down 4 percent, weighed down by global concerns. Cement stocks suffered after duty was raised on producers selling above a certain price.
INFLATION FIGHTING:
Chidambaram said the economy was in a stronger position than ever to promote "inclusive" growth, equity and social justice. "It therefore behoves us to set higher goals," he said.
But the consequence of expansion has been higher inflation as supplies fail to keep pace with demand and infrastructure such as ports and power has struggled to cope.
The central bank has tightened policy and Deputy Governor Rakesh Mohan said it would keep taking action as necessary, sending the yield on the 10-year government bond to 7.98 percent, up 9 basis points on the day.
Wholesale price inflation touched 6.73 percent in early February, fuelled partly by food prices, and Chidambaram said such a huge country must be self-sufficient in basic food items, otherwise supply constraints could upset macroeconomic stability.
"Hence agriculture must top the agenda of the policymakers," he said.
The 2007/08 fiscal deficit target was 3.3 percent of gross domestic product, down from 3.7 percent this fiscal year, which global rating agency Standard & Poor's said was encouraging.
Chidambaram kept corporate tax rates broadly unchanged, raised the personal income tax exemption threshold and added 1 percent on all taxes to fund education.
He said the tax-to-GDP ratio had increased to 11.4 percent this year from 10.5 percent due to better compliance, gave tax holidays to research and infrastructure projects and said a national goods and service tax would be introduced in 2010.
International rating agency Moody's said the budget was "overly accommodative" leaving too much for the central bank to do in fighting inflation, although other analysts said the package would encourage investment and growth.
"It seems the government is feeling very rich as it is an expansionary budget," said Han-Sia Yeo, a strategist at Bank of America in Singapore.
"The priority seems to be inflation fighting to garner political support, support infrastructure spending and fiscal consolidation in that order."
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