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India tastes unpleasant austerity

Thursday, January 31 12:23:56

India's finance minister is putting welfare, defence and road projects on the chopping block in a last-ditch attempt to hit a tough fiscal deficit target by March, risking short-term economic growth and angering cabinet colleagues.

The cuts will reduce spending by about 1.1 trillion Indian rupees ($20.6 billion) in the current financial year, some 8 percent of budgeted outlay, or roughly 1 percent of estimated gross domestic product, two senior finance ministry officials and a senior government adviser told Reuters.

It is the first time the scale of the cuts and details of where the axe will fall have been made public, with officials revealing startling details about delays to arms purchases and belt-tightening for politically sensitive rural welfare schemes in an election year.

Finance Minister P. Chidambaram has staked his reputation on lowering the deficit to 5.3 percent of GDP to improve the investment climate following ratings agency threats to downgrade to junk India's sovereign debt if action was not taken.

After a series of investor-friendly reforms and small steps to reduce fuel subsidies, he has now turned firepower on big-spending colleagues, some of whom are pushing back, worried cuts will hit voters ahead of a national election due in early 2014.

"Every ministry is affected by the budget cuts. We are trying hard to get as much money as possible," said a senior official in the road transport ministry, who declined to be named because of the sensitivity of the issue.

Data released on Thursday showed the cuts beginning to bite, with capital spending to December down 6.8 percent on the year, in sharp contrast to the government's original budget plan to raise capital spending by 22 percent by March.

A analyst with rating agency Standard and Poor's told Reuters that the possibility of India losing its investment grade status has receded somewhat as a result of economic reforms undertaken by the government since last September, although there remained at least a one-in-three chance.

Policymakers say getting India's finances in order will give private players room to borrow and the confidence to invest.

A drop-off in investment, hurting growth, is blamed in part on public spending that is funded through market borrowing crowding out the private sector.

"With fiscal discipline, what will happen is that there will be larger money with the private sector, which can be used for the growth," said B.K. Chaturvedi, a senior adviser to the government on infrastructure spending.

Chidambaram will officially report the revised spending figures for 2012/13 when he presents next year's budget to parliament on Feb. 28.

"It is I who have done the math, the deficit will remain below 5.3 percent this year, next year it will be below 4.8 percent. I am not going to cross these red lines," Chidambaram told Reuters in an interview on Tuesday.

His attention has turned to spending because revenue has dropped. The economy is on track to grow about 5.6 percent this year, the lowest rate for a decade, and the government is struggling to raise $10 billion in hoped-for windfall cash from partial privatisations and mobile spectrum sales.

The government had originally targeted a fiscal deficit of 5.1 percent in the current financial year, but loosened the target in October. It was 5.8 percent in 2011/12. ( C) Reuters