Wary of downgrade, India tries to balance budget

NEW DELHI, March 3, (AFP): 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 percent 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 percent of GDP in the fiscal year to March 2014, down from 5.2 percent currently.

The deficit goal is a “signal to the economic gloom will probably last.

Moody’s said it expected sluggish growth would stretch into the second half of the decade, offering the coalition government little hope of a pickup before the elections.

Forecasts used by the government predict the economy will grow by 1.2 percent in 2013 and 2 percent next year.

But estimates like that have routinely proven too optimistic. A year ago, the same official forecasters were predicting the economy would grow 2.7 percent in 2014.

A Reuters poll of private-sector economists last month predicted growth of 1.6 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 $75 billion 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 percent, health by 24 percent, agriculture by 22 percent and rural development by 46 percent.

He also earmarked $1.8 billion for a percent next year, better than the 1 percent growth forecast for the euro zone and only a touch slower than the forecast for Germany, but worse than the British government expects.

Some say the steady drip of weak economic data recently means Britain’s outlook is deteriorating.

Not only did the economy shrink slightly in the last three months of 2012 but investment by businesses fell by 1.2 percent, a potential warning sign of more weakness to come. Factory activity shrank sharply in February, data showed on Friday.

“The optimistic view is that everything flagship food security bill intended to provide cheap grain 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 percent next year — far below the 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 percent.

In the current year to March growth is expected to clock 5.0 percent — the weakest in a decade.

“These headline (deficit-cutting) numbers will come as a relief to the rating agencies,” said Credit Suisse economist plays out nicely and we get back towards trend rates of growth. But there are structural factors pulling down on growth and they aren’t going away,” said Philip Rush, a UK economist with Nomura.

He thinks British gross domestic product will grow by just 0.4 percent this year by and 0.8 percent in 2014, held back in large part by the country’s banking sector.

The fragile state of the country’s banks mean many are too weak to resume significant amounts of new lending.

“Most people, when pushed, acknowledge that the problems in the financial sector aren’t going away, but they are not 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 16.7 trillion rupees ($310 billion) and he is assuming strong revenue growth to pay for it, including sales of state assets in a widely acknowledged tough market, and the 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 percent,” Bhalla commented in the Indian Express daily, adding “such a swelling is most unlikely, given the slow growth of the Indian economy”. factored in,” Rush said.

Getting a loan is something many UK businesses say remains far too hard, despite official programmes to boost lending such as the Bank of England’s Funding for Lending scheme.

One of Britain’s oldest manufacturing firms, Hayward Tyler Group, which makes specialist pumps and motors the size of small cars for use in power stations around the world, grew so frustrated with its bank last year it turned instead to a strategic investor in India. It provided the funding support needed for expansion in India’s booming market and beyond.