By Ruma Paul
DHAKA, June 9 (Reuters) - Bangladesh's government unveiled a budget for fiscal 2011/12 year on Thursday which increases spending on key sectors by nearly a third to tackle power shortages which are curbing growth and deterring investment.
Spending on key development needs such as power and transport will increase by 31 percent from this fiscal year to 460 billion taka ($6.3 billion), of which 60 percent would be provided by the government and the rest by overseas lenders, Finance Minister Abul Maal Abdul Muhith told parliament as he presented the 1.6 trillion taka ($22 billion) budget.
Overall spending will increase 23 percent in the year from July 1 to 1.6 trillion taka, he said. The government aims to cap its deficit at 5 percent of gross domestic product in 2011/12, up from a revised 4.4 pct of GDP in 2010/11.
It is targeting a 27 percent rise in tax revenue to 1.18 trillion taka in the coming fiscal year, largely due to improvements in tax collection and crackdowns on evasion.
Bangladesh aims to bolster economic growth to a record 7 percent in the coming year, from 6.7 percent targeted in 2010/11, and expects inflation to ease slightly to 7.5 percent against a revised target of 8 percent this year, he said.
Price pressures are a major concern for the government as nearly 40 percent of the country's more than 150 million people live on less than $1.25 a day.
The budget is the third for Prime Minister Sheikh Hasina's government, which won office with promises to cut poverty, improve utilities, and produce and supply more energy.
The budget will ramp up social spending by providing subsidised grain to more of the country's poor and creating more jobs, promising some relief to those hit the hardest by high food costs, but sparking worries about its huge cost.
Relentless price rises are also straining government finances by amplifying its already huge subsidy bill.
The government will allocate 140 billion taka ($1.9 billion) in subsidies for fuel, power, food and fertiliser in the coming fiscal year. Its subsidy bill in the current year likely blew out to 143 billion taka from an original estimate of nearly 10.3 billion taka, largely due to higher global oil and commodity prices.
The government is hoping to trim subsidies modestly but will continue to face a growing burden even if it succeeds in capping total subsidies at 2 percent of GDP, barring a sharp reversal in global commodities prices.
Global lenders such as the IMF and the World Bank are pressing the government to raise oil, gas and electricity prices further.
The government increased prices for fuel and natural gas last month but the hike was a modest one. Further cuts in subsidies are bound to increase political pressure and spark more public protests.
General elections are not due until late 2013 but the opposition has been demanding earlier polls as food and other prices continue to rise.
"The budget may broadly be considered as 'growth friendly' with a significant rise in the targeted public outlay on priority sectors including power and energy," Mustafa K. Mujeri, director general of Bangladesh Institute of Development Studies, told Reuters.
"A major challenge for implementing the budget is to enhance the capacity of the ministries to implement the projects ensuring quality. Another challenge is the growing burden of subsidies for fuel, power, fertilizer, and food which might rise if global prices further increases."
"The real burden can be somewhat reduced if the government ensures the productive use of input subsidies and can reduce leakages," said Mujeri, also a former chief economist of the central bank.
Some economists said the new fiscal measures were achievable and likely to boost the economy if implemented. The country has a reputation for inefficient budget implementation. (Editing by Anis Ahmed, Ron Askew)