New Delhi: India may be able to cut its fiscal deficit to 4.5% of GDP by March 2011 due to revenues from 3G auctions and robust economic growth, finance secretary Ashok Chawla told Reuters on Monday.
The sale of third generation mobile phone licences and broadband access are bringing in some $23 billion into state coffers, and a narrower deficit should help the government reduce its record Rs4.57 trillion ($97.75 billion) in borrowing that had been expected in the fiscal year to next March.
“This seems a reasonably accurate projection particularly in the light of the increased non-tax revenue from the telecom auction and the robust growth which the economy is showing,” Chawla said in an interview in the Dealing Room, a Reuters Messaging chat room.
Chawla said the 3G auctions by themselves had the potential to cut the deficit by about 100 basis points by March 2011.
He also said the government was “very keen” to restrict India’s fiscal deficit.
Chawla said: “I do not see any chance of it exceeding the projected 5.5% (in this fiscal year).”
India had projected a budget deficit of 5.5% for the fiscal year that ends in March 2011, down from a 16-year high of 6.9% of GDP in the last fiscal year.
Inflation a Supply Side Problem
Chawla said inflation would ease, despite government data that showed prices accelerating in May.
“Inflation is grounded in supply side problems and the base effect since we view it on a year-on-year basis,” Chawla said.
He said while supply side constraints would keep inflation at an elevated level, broader pricing pressures were easing.
“Inflation is slowly but definitely moving southward. Supply side constraints will no doubt keep it elevated more than normal levels. It should be in region of 5-6% by December 2010 as mentioned by the Prime Minister.”
The wholesale price index, the central bank’s most closely watched gauge of inflation, rose an annual 10.16% in May, faster than analysts’ expectations, driven by higher food and fuel prices, government data showed on Monday.
India’s 10-year bond yield rose as much as 4 basis points after inflation data for May came in above market expectations.
The higher-than-expected headline inflation figure has again raised calls for a hike in key policy rates even ahead of the 27 July policy review by the RBI.
“It is a close call as the liquidity situation is not very easy, but the RBI may tighten by 25 basis points before July, more to give a signal that it is willing to do what it takes to manage inflationary expectations”, said analyst Sebastien Barbe, head of Emerging Markets at Credit Agricole, Hong Kong.
However, the finance secretary said that high inflation levels are mainly a supply side problem, hinting that raising rates may not be a solution.