May 24 (Bloomberg) -- Palaniappan Chidambaram was named India's new finance minister, a portfolio he held from 1996 to 1998 when he cut capital gains and company taxes. Stocks rose as Chidambaram is expected to continue the market-opening policies initiated by Prime Minister Manmohan Singh as finance chief in 1991.

Singh's Congress party-led coalition unexpectedly defeated Atal Bihari Vajpayee's National Democratic Alliance after promising to spend more on irrigation and ease the plight of India's 260 million poor, a quarter of the world's second-most populous nation.

Chidambaram, 58, will need to balance the Congress's commitment to slow the pace of asset sales while applying himself to cut the budget deficit, which was trimmed to a six-year low in the year to March 31 by Vajpayee's government on the back of sales of companies such as Maruti Udyog Ltd., India's biggest carmaker.

``You have two reformers at the top and the good combination will provide comfort to investors,'' said Amitabh Mohanty, a debt fund manager who helps invest the equivalent of $398 million at Alliance Capital Assset Management in Mumbai. ``This combination will ensure they carry forward the momentum achieved by the previous government on reforms.''

The Mumbai stock exchange's key Sensitive Index rose more than 2 percent as Chidambaram took office today. The benchmark had a two- day, 17 percent drop last Monday and the previous Friday on concern the newly elected Congress-led government won't sell state assets, deterring overseas investors from buying local stocks. The index posted its second weekly decline last week, led by Oil & Natural Gas Corp. and Reliance Industries Ltd.

`Pro-reform Record'

Investors such as Anish Mathew of SG Asset Management Ltd. in Singapore said they expect the market to arrest its fall as it digests Singh's ministry formation and the government's economic program worked out with its Communist backers, due to be published on Thursday.

``We are happy with Chidambaram's appointment as he has a pro- reform track record,'' Mathew said.

Chidambaram, one of the country's top corporate lawyers, was finance minister from 1996 to 1998 in a non-Congress government.

In his 1996 budget, he introduced a minimum 12 percent tax on company profit, cut long-term capital gains tax to 20 percent from 30 percent, set up the Infrastructure Development Finance Co. to provide loans for up to 20 years for building power plants and other projects and allowed single overseas investors to hold as much as 10 percent of an Indian company.

Wooing the Poor

Before that, Chidambaram was trade minister in the 1991-1996 Congress-led government, a colleague of Manmohan Singh, who as finance minister was beginning the process of opening up India's economy to competition and dismantling controls. Skills at economic management won't be lacking in the new government.

``Manmohan Singh is the best choice for prime minister at this point of time,'' said Saumitra Chaudhuri, chief economist at rating company ICRA Ltd. ``No one else knows the nuances of the Indian economy better than him in the country today.''

Chidambaram will have to retain the confidence of business, industry and investors while wooing the nation's poor, a group pivotal in the Congress party's victory.

Vajpayee's government lost power because of a backlash by poor voters who felt left out of a boom that helped Asia's fourth-largest economy grow 10.4 percent in the final three months of 2003, vaulting India above China as the world's fastest-growing economy during the period. The $575 billion economy grew an estimated 8.1 percent in the year through March, the fastest pace in 15 years.

Budget

Chidambaram, who may present his budget as early as next month, may announce plans to increase investment in agriculture and rural areas. He may also pledge to lift equity limits on foreign direct investment and curb the budget deficit.

Prime Minister Singh told reporters last week his top priority was ``the battle against poverty,'' pledging economic liberalization ``with a human face.''

The Congress party also wants to raise spending on health care and education as a share of gross domestic product and unleash investment in roads, irrigation and power in the countryside, home to three quarters of India's population, including most of its poor.

The government has little scope to borrow the money required. Combined, India's federal and state government deficits have been about 10 percent of gross domestic product since 1998. Standard & Poor's said in April the deficit is a ``concern'' that may hamper economic growth, preventing an upgrade of India's sovereign BB+ rating, the highest non-investment grade.

Tax Changes

Singh has said his government will seek to cut the budget deficit to 3 percent of GDP in three years from an estimated 4.8 percent in the year through March. Rising rural incomes fueled by higher investment will raise growth to 10 percent a year, boosting tax receipts, he says.

The Congress has also promised an overhaul of the tax system to increase the number of India's 400-million-strong workforce who pay tax from just 28 million. Proposals include a uniform value-added tax on sales, a plan postponed several times by the previous government because of opposition.

Investors say the government needs to tax more services, the fastest-growing part of the economy. Taxes on services, now accounting for more than half of GDP compared with 35 percent in 1980, contribute just 5 percent of total revenue.

``The government must find a meaningful way to tax services,'' said D. H. Pai Panandikar, director general of RPG Foundation, a New Delhi-based policy research institute.

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.

Last Updated: May 24, 2004 01:09 EDT