India curbs subsidies to pare widest BRIC deficit
India’s government raised spending on the poor to court support before elections, relying on higher taxes, asset sales and subsidy cuts to help pare the widest fiscal deficit in major emerging nations.
The country targets a shortfall of 4.8 percent of gross domestic product in the 12 months starting April 1, and achieved 5.2 percent in 2012-2013, Finance Minister Palaniappan Chidambaram said in his budget speech on Thursday. Bonds fell the most in seven months as Chidambaram unveiled record borrowing to finance the excess of expenditure over revenue. “The Indian economy is challenged,” said Chidambaram, whose 2014 deficit goal is a six-year low as he strives to avert a credit-rating downgrade. “We will get out of the trough and get on to the high growth path. Fiscal consolidation cannot be effected only by cutting expenditure. Wherever possible, revenues must also be augmented.”
Government spending has contributed to inflation of almost 7 percent, which has limited the extent of interest-rate cuts by the central bank in an economy expanding at the weakest pace in a decade. Chidambaram allocated 330 billion rupees ($6.1 billion) for the ruling coalition’s flagship rural jobs program and 100 billion rupees for a plan to give the poor cheap food grains, ahead of a general election due by 2014. The yield on the 8.15 percent note due June 2022 climbed to 7.87 percent at 4:33 p.m. in Mumbai from 7.80 percent yesterday. “The budget is disappointing as, even though it is trying to achieve fiscal consolidation, expenditure is still very high,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “The crucial thing would be to see how credibly the government delivers on deficit cuts amid the growth slowdown and in the run up to the elections.” Total expenditure will climb to 16.7 trillion rupees in 2013-2014 from an estimated 14.3 trillion rupees this financial year. The budget set gross market borrowing at a record 6.29 trillion rupees for 20132014, an increase of almost 13 percent. Net borrowing will be 4.84 trillion rupees. Chidambaram imposed a one- year 10 percent tax surcharge on annual personal incomes above 10 million rupees and increased customs duties on yachts, high-end motorcycles and luxury cars. He raised the surcharge on some companies to 10 percent.
Projected spending on a subsidy program ranging from diesel to food and fertilizers will decline about 11 percent to 2.2 trillion rupees in 20132014. Oil subsidies will decline 33 percent to 650 billion rupees. Prime Minister Manmohan Singh’s administration partially freed diesel prices from state control in January to allow gradual increases. Singh is trying to reduce the cost of compensating refiners for below-cost sales. The funds for grains were earmarked for the pending National Food Security Bill. Food sub- sidies will climb to 900 billion rupees next financial year from 850 billion rupees. The legislation will provide cheap rice, wheat and millet to more than 60 percent of India’s 1.2 billion people after approval by parliament. About two-thirds of the population live on less than $2 per day, based on World Bank data. “It was a very politically astute budget,” said Satish Misra, a political analyst at the Observer Research Foundation, a policy group based in New Delhi. “There was something for everyone.”
Singh appointed Chidambaram as finance minister in July to help spearhead economic reforms, after Standard & Poor’s and Fitch Ratings warned they may cut India’s credit rating to junk status on risks from the fiscal deficit, a current-account shortfall and an earlier paralysis in policy making.
Chidambaram in 2012 revised the budget-deficit goal for this financial year to 5.3 percent from 5.1 percent of GDP. He set a target of narrowing it to 3 percent by 2017. The shortfall, which was 5.8 percent in 2011-2012, is the widest in the BRIC group, which also includes Brazil, Russia and China.
Today’s budget targeted revenue of 558 billion rupees from sales of shares in state-owned companies in 2013-2014, up from 240 billion. It seeks about 408 billion rupees from telecom spectrum and license sales.
Reserve Bank Governor Duvvuri Subbarao said Feb. 16 he will weigh the quality of the government’s fiscal adjustment, adding.