India sees deficit challenge due to subsidies, stake sales

A worker welds iron rods at the construction site of a commercial complex in Ahmedabad November 29, 2012.

NEW DELHI (Reuters) - India said uncertainty over stake sales in state-run companies and soaring subsidies pose a challenge to reducing the fiscal deficit, which is the widest among big emerging economies and has put in peril the country's investment grade credit rating.

In a mid-year economic review presented in parliament on Monday, the government also pared its official growth forecast to between 5.7 and 5.9 percent for the current financial year, which ends in March 2013, from the 7.6 percent it had estimated this past March.

Finance Minister P. Chidambaram recently said growth would be between 5.5 and 6 percent this year, which would be India's lowest rate of expansion in a decade.

With barely 18 months left until the next general election, Prime Minister Manmohan Singh is running against time to revive the economy and shore up his Congress party's electoral fortunes.

Last week, New Delhi sold 10 percent stake in state miner NMDC (NMDC.NS), which fetched $1.1 billion. The government is aiming for 300 billion rupees from such partial privatisations by March.

Selling equity in large public industries is a central plank of the government's plan to meet the target of a fiscal deficit of 5.3 percent of gross domestic product (GDP) in the year that ends in March.

Global rating agencies and investors are putting pressure on New Delhi to shore up its public finances, which have been hit by subdued tax revenue and higher spending on subsidies.

India's expenses on major subsidies, including those on food, jumped by almost half to 1.42 trillion rupees in the first half of the fiscal year 2012/13, the finance ministry's review said.

The mid-year economic review conceded that meeting the stake sale target will be a "challenge", but said the government should be able to meet its fiscal deficit goal.

"Uncertainty on account of disinvestment receipts and likely higher subsidy requirement does make it a challenging task to adhere to the overall fiscal deficit target during 2012-13," the report said.

"With likely revival in the economy and the measures already taken and those on the anvil, it is likely that fiscal deficit for the year would be 5.3 percent of GDP."

D. K. Mittal, the secretary in-charge of the stake sale programme, said on Monday the government's share sales were on track. He said he was looking at new ways to attract investors to large offerings in Oil India (OILI.NS) and power company NTPC, (NTPC.NS) set to come in the next few weeks.

"We have to have a strategy keeping in mind that the market tends to bring in the price at the lower level," Mittal told the CNBC television network.

The Indian economy grew 5.4 percent in the first half of this fiscal year, far below the near double-digit pace before the global financial crisis.

(Reporting by Arup Roychoudhury; Writing by Rajesh Kumar Singh; Editing by Frank Jack Daniel and Richard Borsuk)