India sticks with austerity to meet deficit target
NEW DELHI • The Indian government will have to rein in spending and cut subsidies to meet its fiscal deficit target, the country’s finance minister said on Monday, underlining that an austerity drive will not be blown off course by an election due next year.
Palaniappan chidambaram told reuters ahead of a trip to the united States — where one stop will be to woo investors on the West coast — that he will not allow the deficit to cross a “red line” set at 4.8% of gross domestic product this fiscal year.
“We’ve issued austerity instructions, it will bring us some savings,” he said.
The finance minister’s vow to contain the deficit means there will be little room ahead of a tough election to spur growth, which has slumped from a double-digit pace in early 2010 to below 5.0%, its lowest in a decade.
The government recently introduced a plan to distribute cheap food for two-thirds of the population, a step widely seen as wooing voters ahead of the election. but, without giving details, Mr. chidambaram pointed to food subsidies as one area where spending would need to be addressed in coming months.
Along with pallid growth, Asia’s third-largest economy is facing stubborn inflation, companies are struggling and bank asset quality is worsening. but Mr. chidambaram shrugged off the risk of a cut in India’s sovereign credit rating, which is one precarious notch above junk status.
“There is no case for a downgrade,” he said in an interview at North block, the sandstone colonial building that houses the finance ministry in New delhi. “If any rating agency is looking for candidates to downgrade, there are half a dozen other countries.”
The Indian rupee was one of the hardest-hit emergingmarket currencies recently amid alarm in financial markets about an imminent “tapering” of the u.S. Federal reserve’s monetary stimulus, falling by about 20% at one point from May.
It has recovered somewhat recently, and Mr. chidambaram said the central bank may now be able to consider reversing some of the liquidity tightening steps it took to shore the currency up.
“If the volatility of the rupee has been contained and speculation has come to an end, the central bank may want to unwind some of the measures it took earlier, he said.
On Monday the reserve bank of India cut a key overnight interest rate, further dialing back an emergency measure it had imposed in mid-July in order to defend the rupee that had tightened market liquidity and pushed up borrowing costs.
Mr. chidambaram said there would be some impact when the Fed’s tapering — which was put on hold — does eventually come, but it was now mostly factored into the market and he was confident that speculators had been put in their place.
“We think we have sent a message to everyone — don’t speculate on the rupee,” he said.
Mr. chidambaram said the economic downturn was no reason to think that his congress party, which has been weakened by years of fractious coalition rule and a string of corruption scandals, would be ousted in a national election that must be held by May.
“don’t write us off so easily,” he said, adding that the next leader of the congress party would be rahul Gandhi, scion of the Nehru-Gandhi dynasty that has ruled India for most of its 66 years since independence.
“I am glad you acknowledge Prime Minister rahul Gandhi, but that is a question you should put to him,” Mr. chidambaram said, when asked if he would serve again in a government led by the party’s heir apparent if congress wins a third straight term in office. “The time has come for the torch to be passed on to a new and younger generation.”