India's new government reveals plan for jobs, low inflation

NEW DELHI Mon Jun 9, 2014 12:14pm EDT

India's Prime Minister Narendra Modi (C) walks to speak with the media as he arrives to attend his first Parliament session in New Delhi June 4, 2014. REUTERS/Adnan Abidi

India's Prime Minister Narendra Modi (C) walks to speak with the media as he arrives to attend his first Parliament session in New Delhi June 4, 2014.

Credit: Reuters/Adnan Abidi

NEW DELHI (Reuters) - India's new government will use public and private investment to create jobs for the millions who enter the workforce every year and will make containing inflation its top priority, President Pranab Mukherjee told parliament on Monday.

Outlining Prime Minister Narendra Modi's economic plan following his landslide election victory last month, Mukherjee said the government would introduce a general sales tax, encourage foreign investment and speed up approvals for major business projects. It would also tackle bottlenecks that have caused food prices to rise more quickly in India than in any other major economy.

Although Asia's third-largest economy is in its longest slump for a quarter-century, consumer inflation has been stuck at an average of nearly 10 percent for the past two years and was one of the main issues that brought Modi to the helm of the world's largest democracy.

Ten million people enter the workforce every year as the largest youth bulge the world has ever seen reaches working age. The demographic shift may help propel India into the league of developed nations, but risks causing economic and social disaster if it is not harnessed effectively.

The anti-inflationary message will be welcomed by central bank governor Raghuram Rajan, who has made lowering India's growth-stifling high interest rates contingent on containing consumer prices. However, dampening prices will not be easy.

Shortages of warehousing, a dependence on monsoon rains and a complex network of middlemen that leads to price gouging and irregular supplies of vegetables in mainly vegetarian India is blamed for much of the volatility. Last August, onion prices soared by an annual 245 percent.

Forecasts suggesting there will be less rain than normal this year add to the government's headaches.

Some of the new government's proposals to fix the problems by clamping down on "hoarders" and building more cold storage are not new, but hopes now rest on Modi's reputation for delivering on his promises.

"We are committed to breaking this vicious cycle of high inflation and high interest rates," Finance Minister Arun Jaitley said on Monday in a pre-budget speech to state governments.

When Jaitley delivers the budget in early July, he will try to balance reducing inflation with the need to revive economic growth from its second year below 5 percent.

Some advisers to Modi and Jaitley have suggested loosening the purse strings to quickly stimulate the economy. Others favor slashing the deficit to 3.8 percent of GDP this fiscal year, even faster than the 4.1 percent goal in the last budget.

Recent comments by Jaitley suggest he will try to walk a fine line between the two, by cutting subsidies to finance more spending on infrastructure investments.

In a speech on Sunday, he warned against "temporary populism" that could create problems in a few years' time, while on Monday he said economic growth could not be compromised "at any cost" and called on state governments to be fiscally responsible.

"An emphasis on growth by improving the supply side ... in turn will restrain broad inflation pressure," said Shubhada Rao, chief economist at Yes Bank in Mumbai. "The first two years would be to create an enabling environment for growth to take off," Rao said. "There is no trade-off between inflation and growth."

India is considering a proposal to raise the price of urea, the fertilizer most used by its farmers, by at least 10 percent in order to curb subsidies, government and industry officials have told Reuters. The economy grew by 4.7 percent in 2013/14, about half its pre-crisis rate, dampening India's aspirations to emulate China's rise. To get back on track, the government will urgently pursue reforms to the state-run coal sector and the defense industry to attract private investment, the president said, while speeding up project clearances to promote labor intensive manufacturing industries.

ELECTRICITY FOR ALL

From the government side, the attack on inflation will include public and private investments in agriculture, including irrigation. If the monsoon falls short, India will consider giving subsidized diesel, cheaper loans and extra seeds to farmers, Farm Minister Radha Mohan Singh said.

The government also promised to ensure that every family had a good home with uninterrupted power supplies by 2022. It will urgently seek to revamp the creaking railway system, focusing on high-speed trains, as well as road and airport building.

The speech contained promises to modernize government with technology and to take broadband connections to every village within five years, although many of the proposals have also been made by previous governments.

"We have heard all the right noises, but we have to wait to see all these intentions translating into action. In other words, the government has to walk the talk," said A. Prasanna, an economist with ICICI Securities in Mumbai.

(Additional reporting by Rajesh Kumar Singh in NEW DELHI and Neha Dasgupta in MUMBAI; Editing by James Macharia and Toby Chopra)

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