New Delhi: India’s deficit-heavy Budget, which alarmed investors when it was released on Monday, marks a cautious approach against the backdrop of an uncertain global economy, a top policy adviser said.
Investors had hoped the new government would use a strong re-election mandate to push through pro-market reforms, but the populist Budget unveiled on Monday lacked significant policy changes and focused heavily on increased borrowing and spending to aid farmers and the poor.
“Government is erring on the side of caution,” Saumitra Chaudhuri, a member of India’s policy-making Planning Commission told Reuters in an interview after the release of a Budget report that sent stocks tumbling 6%, their worst session in six months, and saw bonds yields jump and the rupee fall.
“Suppose...things are improving but something else happens and again there is a bit of a blip. Do you start recalibrating policy or just play it safe? I think that’s the decision they’ve taken. They’d rather play it safe than be sorry,” he said.
The government said its fiscal deficit would blow out to 6.8% in the fiscal year that ends in March 2010, its highest level in 16 years, as it boosts spending to support the slowing economy.
The new deficit target is far higher than the 5.5% set in the interim and pre-election Budget in February.
The seven-member planning commission, headed by Prime Minister Manmohan Singh, is charting a five-year policy blueprint for the government. Montek Singh Ahluwalia, a close ally of Singh, is the panel’s deputy chairman.
Chaudhuri, describing the past year as a “policy hothouse” that required frequent action, said he expects the government to adopt corrective measures and put a lid on the deficit as early as next year, once growth picks up and revenues rebound.
“I can see us going back to the path of fiscal consolidation very soon,” he said. “You are going to have a significant amount of fiscal correction from next year onwards. So on this, we are very, very alive to the issue.”
Chaudhuri said he expects the government to spell out details on asset sales soon. In his Budget speech finance minister Pranab Mukherjee did not introduce any roadmap for asset sales, disappointing financial markets.
Budget documents showed the government plans to raise Rs11.20 billion ($231 million) through company stake selldowns this, far short of the Rs250 billion a year in divestitures suggested in a finance ministry report last week.
“I think we’ll see that maybe in the next month or so,” he said, referring to details on divestiture plans.