India's deficit-cutting plan faltering as clock ticks

NEW DELHI Mon Nov 26, 2012 9:59am IST

1 of 2. Finance Minister P. Chidambaram gestures during an interview with Reuters at a hotel during his visit for the G20 meeting in Mexico City November 4, 2012.

Credit: Reuters/Edgard Garrido/Files

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NEW DELHI (Reuters) - Finance Minister P. Chidambaram has banned government officials from holding conferences at five-star hotels, restricted travel and ordered a freeze on hiring to fill vacant posts.

A single-minded political veteran who commands both fear and respect in officialdom, Chidambaram is squeezing government ministries hard to cut spending wherever they can, and quickly, to help rein in a widening fiscal deficit.

He is a man under pressure and with an eye on the clock.

Four weeks ago to the day, he set himself an ambitious target: to hold the government's fiscal deficit for 2012/2013 to 5.3 percent of gross domestic product, even as sceptical private economists forecast a deficit closer to 6 percent.

But a series of revenue-raising setbacks since October 29 now means it will be almost impossible for the government to meet that target, economists say, and some finance ministry officials privately agree. That increases the risk that credit rating agencies could downgrade India to junk in the coming months.

"This has taken on a very great sense of urgency," said Rajiv Biswas, chief Asia economist at market information and analytics company IHS, as he called on Chidambaram to draw up a credible medium-term road-map for cutting the deficit.

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The deficit reduction plan unveiled by Chidambaram last month was panned by economists for being short on specifics and putting a firewall around fuel subsidies and expensive social welfare programmes for the country's millions of poor.

A month earlier a deficit reduction panel appointed by Chidambaram had urged the government to cut such spending. Their language was dramatic: India was on the edge of a "fiscal precipice" and the economy was "flashing red lights", they said.

"BAND-AID APPROACH"

The government is pursuing a "band-aid approach" to deficit reduction, favouring quick fixes instead of implementing structural reforms to slash the deficit, said economist Rajeev Malik of CLSA in Singapore, who is sticking to a deficit forecast of 6 percent of GDP.

Financial markets are already expecting the government to overshoot its target and hit around 5.6 percent of GDP, which helped push benchmark 10-year bond yields to the highest in nearly three months late last week.

But the big unknown is the response of the rating agencies, which have repeatedly warned India to get its finances in order.

The agencies are unlikely to reveal their thinking until after Chidambaram unveils his budget in February, analysts said.

But in October, Standard & Poor's said India still faced a one-in-three chance of a downgrade within the next 24 months. Such an outcome would hurt investor sentiment and push up overseas borrowing costs for Indian companies.

Chidambaram, 67, a lanky politician with a disarming smile that belies a sharp tongue and an intolerance for time-wasting, charmed financial markets with his can-do attitude and burst of economic reforms in September, after years of policy inaction by Prime Minister Manmohan Singh's weak coalition government.

Sensex rallied more than 6 percent after the reforms were announced in mid-September. But concerns over implementation, the fiscal deficit and falling foreign fund inflows have since pushed it down 3.3 percent.

"We believe that this is the beginning of the realization that a sustainable turnaround in India's growth prospects would require considerable effort, well beyond the burst of measures seen in September," Deutsche Bank said last week in an analyst note headlined "Reality Check".

MAN ON A MISSION

Chidambaram's deficit reduction plan banks heavily on raising billions of dollars by auctioning off cellphone airwaves and selling shares in state companies.

Neither effort is going particularly well.

The government raised less than a quarter of its 400 billion rupee target in a 2G spectrum auction in mid-November. A second auction is planned before March, but a senior government official told Reuters there would likely be at least a 200 billion rupee shortfall.

The government succeeded in raising 8.1 billion rupees by selling shares of state-run Hindustan Copper Ltd on (HCPR.NS) Friday, although the deal was supported by buying from state institutions.

To put the deal in context: New Delhi aims to raise 300 billion rupees by selling shares in state companies this fiscal year, which ends in March. Excluding the latest sale, it has managed just 1.25 billion rupees so far.

The government is staring at an overall shortfall of nearly 500 billion rupees in revenues this year, the government official said, speaking on condition of anonymity because of the sensitivity of the subject. This may require additional borrowing from the market.

Chidambaram's battle to tame the deficit takes place against the backdrop of a continued economic slowdown, and a fractious parliament where the government has lost its majority after its biggest coalition ally withdrew support to oppose its reforms.

Manufacturing is contracting and exports are falling. India's October trade deficit of nearly $21 billion was its worst on record.

And a second round of reforms aimed at liberalising the pension and insurance sectors has fallen victim to gridlock in parliament. It is not clear if the measures, long sought by investors, will be passed in the current winter session.

But Chidambaram, who began his second stint as finance minister in August, gives no appearance of being disheartened and as recently as Saturday was confidently predicting he would be able to contain the deficit to 5.3 percent of GDP.

Inside his ministry, officials said the target looks daunting but they have had no word of a revision from the minister. Instead, he has intensified pressure on them to find ways of meeting the target, they said.

Chidambaram's credibility is not yet on the line, said analysts. In fact, perhaps the opposite. His credentials as an economic reformer during two previous stints as finance minister are buying him time to pull India back from the fiscal precipice.

(Addtional reporting by Frank Jack Daniel in NEW DELHI, Swati Bhat, Sumeet Chatterjee and Subhadip Sircar in MUMBAI; Editing by Alex Richardson)

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Comments (2)
RKFARIDABAD wrote:
cut in fiscal deficit is not an easy task. so long a fuel subsidies remain the fiscal deficit tends to remain widened.the fiscal deficit can not be kept under control unless the rural populace take up the productive jobs. the agriculture remained neglected for long and hence the growth is not sustainable. 2.5% growth with 65% people engaged in this activity is to minor. even manufacturing sector is held up for want of strong infrastructure. fiscal deficit in any case will remain near 5.8%. fiscal defcit would come back to the level of 5% when the growth reaches to 7.5% which in the near term is not possible.

Nov 28, 2012 9:44pm IST  --  Report as abuse
KManoj wrote:
Is this for real? Does the ivy-league degree holder cabinet not know about variance analysis? Travel and meeting costs could never possibly pay for the high cost and even higher losses attributable to the bloated and lethargic government machinery and it’s knee-jerk actions.

This government blunders from disaster to disaster:
2008 – Pushed a $1bn infra program with much fanfare, with 50% of the spends planned from the market, just after GFC!! Market dried up in 2011 – many projects in power, roads, ports, railways stalled – government wishing away the huge investment lock-ups and resultant economic losses to follow in years to come.
2009 – Several scams exposed by media, depicting large scale diversion of public money and national resources to cronies. Took no action on black money stashed abroad, rather protected identity of suspects.
2010 – Introduced a massive rural employment guarantee, diverting labor from industry, agriculture into non-productive schemes, thus hiking costs in labour intense sectors. Also started huge food and medical subsidies which government clearly could not afford.
2011 – Tried to push retrograde taxes, hike prices of fuel, public services, to collect more from already struggling industry. At the same time, almost doubled salaries of MP’s/MLA’s and government employees. Meanwhile, MNC’s challenge in courts put a halt to ill-conceived actions.
2012 – Made a populist budget, with loan write-offs and subsidy expansion. Kept insisting the economy would grow, inflation drop and fiscal deficits will be easily under control, despite most economists and WB expressing disbelief. Puts onus of inflation on RBI, and strong-armed it to drop interest rates, despite increasing risks to currency and a stuttering economy.
Nearly 2013 – Trying divestments, license sales and FDI. Sell-offs with public sector banks and LIC etc buying majority of shares of government companies no doubt under pressure, making the banks bear the risk and cost of a profligate government. Little surprise that INR fell 10%+ against the weakening USD in 2012, bank credit offtake is low, NIM’s remain high and NPA’s have risen.

Fuel under-pricing is not the only villain, as commented below – Indians already pay slightly more than their Asian cousins, ~50% of which goes to government as taxes and levies. Government needs to rightsize, keep a minimal agenda, and cut back on subsidies to affordable limits, to contain fiscal deficit.

Dec 01, 2012 12:14am IST  --  Report as abuse
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