Hot spots: India.(International Section)

While most Asian nations will experience economic slowdowns in the months ahead, India is likely to enjoy a pick-up. The after-effects of the late-December tsunamis will not hurt growth. With improving monsoons, the performance of agriculture is likely to get better. This is important because--although the sector accounts for only about a quarter of the economy these days--it provides a livelihood for two out of three Indians. Construction, services, trade, and banking and financial services will continue to better their results as well. Most importantly, we believe that manufacturing will gain momentum.

India can count on remaining an attractive place for multinational companies seeking to outsource software development and services, but one needs to keep in mind that the quantitative significance of the IT sector is still--and for the foreseeable future--will remain quite insignificant. IT-related production makes up less than 1% of GDP, and the sector employs under a million people--in a country with a total labor pool of 450 million. What India really needs is strong, tabor-intensive industrial growth, and this requires a reduction in the country's infrastructural deficiencies (companies at this point pay far more than they should for energy, for instance). It requires tax reform and a further liberalization of investment rules. Fortunately, this is exactly the medicine the government has begun to prescribe.

The leading international bond rating agencies declared themselves disappointed by the new budget which Finance Minister Chidambaram has just unveiled, and they do have a point. Overall, the deficit of the central government together with those of the state administrations is expected to remain close to 10% of GDP and this is a red-ink spill which--along with debt levels of 80%-85% of GDP--cannot be sustained. It constrains infrastructure investment, which is only about half the Asian average. It crowds out private capital spending, and it makes reforms in other areas, such as the financial sector, unnecessarily difficult. The household plan essentially puts deficit cutting on hold. The slippage is relatively small, though, and Mr. Chidambaram announced a number of important measures to help business.

The Official said that his government will focus in the coming fiscal year mainly on job creation and on social programs for the rural poor. It will pump USD 3 billion into much-needed infrastructure investment, funding some of this from foreign reserves. The household plan lowers the effective corporate tax rate to 33% from 35%, and calls for a reduction of the peak tariff on all non-farm imports to 15% from 20%. The budget contains no concrete plans to sell more state-owned assets, but it assumes (realistically, we think) that real GDP will show growth of 6.9% in the current fiscal year and more than 7% in the year that begins on April 1.

The household plan felt short of expectations that it would propose a radical reform of the tax system and would do much to promote foreign investment in India. In all fairness, though, an aggressive package of ultra-liberal proposals would have had little chance of making its way through a legislature in which the governing Congress Party has only 145 seats (while it needs 273 for a simple majority) and is, therefore, heavily dependent on allies such as the "Left Front," a doctrinaire Marxist bloc which consists of four Communist parties. Minister Chidambaram evidently deemed it wiser to introduce his reform ...