INDIA’S finance minister pledged in his budget to cut a gaping fiscal deficit in a bid to avert a damaging credit ratings downgrade, but economists remain sceptical he can meet his goal.
In last week’s budget P Chidambaram also hiked spending by a hefty 16 per cent in an effort to woo India’s electorally-crucial rural masses in the countdown to general elections early next year.
But analysts fear his plans are overly ambitious in the face of India’s tepid economic growth.
Wary of ratings agencies which have threatened to lower the country’s credit rating to junk, the minister promised to slice the fiscal deficit to 4.8 per cent of GDP in the fiscal year to March 2014, down from 5.2 per cent currently.
The deficit goal is a “signal to the world” that India is “following a fiscally prudent path”, declared Chidambaram, now increasingly touted as a potential prime ministerial candidate in next year’s elections.
Reigniting foreign confidence in India — once a global investment star — has been a key aim of Chidambaram since returning to the ministry in 2012 with India needing $75bn (£49bn) in annual inflows to fund its huge trade deficit.
Chidambaram, presenting his eighth budget of a two-decade political career, insisted his deficit-cutting numbers were “credible” in the face of financial markets’ alarm at the scale of his spending increases.
He raised outlays on education by 17 per cent, health by 24 per cent, agriculture by 22 per cent and rural development by 46 per cent.
He also earmarked $1.8bn (£1bn) for a flagship food security bill intended to provide cheap grains to India’s poor that is central to the Congress government’s bid to restore its flagging fortunes with polls looming.
Analysts, however, say Chidambaram, despite his reputation as a hard-headed pragmatist, may be relying on overly optimistic revenue projections to pay for his spending promises.
Expansion is officially projected to be 6.1 to 6.7 per cent next year — far below near double-digit rates clocked up in earlier years — but most private economists expect it to be in the neighbourhood of 5.0 to 5.5 per cent.
In the current year to March, growth is expected to clock 5.0 per cent — the weakest in a decade.
“These headline (deficit-cutting) numbers will come as a relief to the rating agencies,” said Credit Suisse economist Robert Prior-Wandesforde, but added there may be disappointment when they look at the underlying numbers.
The challenges are formidable.
Chidambaram outlined spending plans totalling Rs 16.7 trillion ($310bn/£206bn) and he is assuming strong revenue growth to pay for it, including sales of state assets in a widely acknowledged tough market and auction of telecom spectrum even though a recent offering bombed.
Chidambaram’s tax collection assumptions are also under question, said Surjit Bhalla, chairman of Indian emerging markets investment firm Oxus.
“Tax revenue is projected to gallop by a voodoo 19 per cent,” Bhalla commented in the Indian Express daily, adding “such a swelling is most unlikely, given the slow growth of the Indian economy”.
For the moment, though, it looks like Chidambaram is getting the benefit of the doubt.
Both Fitch and Standard and Poor’s, which had warned they might strip India of its prized investment grade credit status, say they are leaving their ratings untouched but have warned of a risk of a spending overshoot.
The government’s commitment towards fiscal discipline will “become more challenging as the elections approach”, said CLSA economist Rajeev Malik.
At the same time, analysts say, there is also a feeling that if anyone can pull off the challenge, it is Chidambaram.
Since taking over the finance ministry from his much-criticised predecessor Pranab Mukherjee, he ruthlessly cut spending by over nine per cent to bring the deficit in on target for this year.
Chidambaram is the “long-distance runner” of the finance ministry, said Delhi School of Economics professor Pulin Nayak.
