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India tightens purse strings to try to cap a deficit

India tightens purse strings to try to cap a deficit

New Delhi: Private economists strongly doubt India can keep its fiscal deficit for the current year from breaching the target in the budget. The finance ministry is serious about trying to prove them wrong.

The ministry has issued an array of directives telling departments to forget about asking for more funds and to hold back on hiring for the rest of the fiscal year, which ends in March 2012.

To many private economists, slowing growth and reduced tax receipts mean the deficit for the year could widen to as much as 5.8% of gross domestic product, compared with the government’s target of 4.6%.

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Indian officials are driven to try meeting the deficit target by their past success in doing so. In seven of the last eight years, India found a way to have a deficit that was smaller than the budget estimate.

The exception, in 2008/09, stemmed from stimulus packages the government launched to counter that year’s global economic crisis. That fiscal year, the deficit target was 2.5% of GDP, but it ballooned to 6.0%.

A lid on spending

To help contain this year’s deficit, the finance ministry is banking on the fact nominal GDP would grow at a higher number than the government-projected 14%, due to high inflation.

But officials are relying more on putting a lid on spending. They recently shot down the demand of state-run railways for a loan of $428.5 million, and asked it to find ways to increase revenue.

Though ministries usually ask for increased budget allocations for additional projects and to meet rising costs, this time finance ministry has declined to meet the demands, citing fiscal restrains despite inflation of nearly 10%.

One official, citing a finance ministry letter to all departments, said no proposals for extra cash will be considered “except in absolutely unavoidable cases."

“We have been clearly told to take all possible measures to meet the fiscal deficit target," the official said. “For now, the political commitment is keep the deficit at budgeted level."

Economic realities will make this a real struggle. Asia’s third-largest economy, which grew 8.5% in the year ended March 2011, will grow less than 8% this year.

Net tax collections in April-August were up only 4.6% year-on-year, compared with nearly 30% year earlier. (For April-August, India’s fiscal deficit was 2.74 trillion ($55.86 billion), or 66.3% of the full-year target of 4.13 trillion.)

Heavy subsidies burden

A huge burden making the deficit widen are government subsidies, which are mounting due to steadily higher crude and fertilizer prices.

The oil ministry has projected state-run oil firms’ revenue losses from selling certain oil products at fixed prices in the current fiscal year may touch $24.4 billion, of which the government may have to subsidize up to $8 billion. An official said the finance ministry has asked the state-run oil firms to take measures to cut costs.

“If required, we may postpone the payment of oil and fertilizer subsidies partly to April," said another official.

Last fiscal year, Mukherjee was helped by windfall gains of more than $13 billion through the sale of bandwidth spectrum, that helped the government to keep the deficit at 4.7% of the GDP.

One of the ministry’s problems this year is that it has hoped to raise about $8 billion through sales of stakes in state-run firms, and this will be difficult to achieve.

Also putting a squeeze on government revenue was a cut in oil duties in June, following a spurt in crude prices. The cut will result in revenue loss of about $10 billion to the exchequer- around 0.5% of India’s estimated nominal GDP this fiscal year.

Good rainfalls help

In other areas, the government eyes savings. Two sources said it expects up to $1 billion savings from about $8 billion spending on rural employment programme due to good rainfalls in the current financial year, besides up to $2 billion savings from proposed expenditure by other ministries.

The federal government has said it will borrow 52800 crore extra before the end of this fiscal year, significantly more than expected, but said it does not expect the move to affect the fiscal deficit target.

Skepticism remains that the finance ministry can succeed in keeping the deficit on target.

N.R. Bhanumurthy, an economist at National Institute of Public Finance and Policy, a Delhi think-tank, said that deferring some spending to next fiscal year “may help the government statistically to keep the fiscal deficit lower", and the way high inflation will raise the nominal GDP will also make the deficit look smaller.

“But the real deficit could cross the 5% mark," he said.