New Delhi: The Bharatiya Janata Party (BJP), will cut spending and increase tax collection if it returns to power this month to plug a revenue shortfall that imperils growth, former finance minister and senior BJP leader Yashwant Sinha said.
“You will have to cut back on whatever expenditure you can without cutting back on essentials,” Sinha said in an interview in New Delhi on Monday, without specifying how much he would seek to curb expenditure.
Sinha estimates that the combined deficit of the Union and state governments may have widened to 13% of gross domestic product (GDP) last fiscal, the highest since at least 1981, and is set to expand further. His projection is higher than the 11.4% ratio forecast by Standard and Poor’s (S&P).
India’s credit rating may be cut to non-investment grade unless the next government reins in spending, S&P said in February.
“This kind of deficit will increase the risk of a sovereign rating downgrade and can trigger capital outflows, putting some pressure on the currency,” said Sonal Varma, India economist at Nomura Securities Co. in Mumbai.
“It will be prudent on part of the government to withdraw its fiscal stimulus when there are signs of investment revival,” Varma added.
Varma estimates that Asia’s third biggest economy will grow 5.3% in the year ending 31 March 2010, with the gross deficit, including that of states, narrowing to 10.3% of GDP from around 11% in the last fiscal year.
The widening deficit forced the government to unveil a record borrowing programme of Rs2.41 trillion in the first six months of the current fiscal year. That may leave the new government little room to stimulate an economy that grew an estimated 7.1% in the year ending 31 March 2010, the slowest pace in six years.
“What we should be doing is release money into the system, reduce interest rates and persuade banks to lend more,” Sinha said.