Chidambaram faces mounting deficit in election year

NEW DELHI Fri Jan 31, 2014 4:07pm IST

Rupee notes are seen in this picture illustration taken in Mumbai June 12, 2013. REUTERS/Vivek Prakash/Files

Rupee notes are seen in this picture illustration taken in Mumbai June 12, 2013.

Credit: Reuters/Vivek Prakash/Files

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NEW DELHI (Reuters) - The fiscal deficit in the first three quarters inched closer to the budgeted target for the whole year, suggesting the finance minister of Asia's third-largest economy faces a challenge to meet the target.

The government is facing a shortfall in tax collections and revenue receipts from the sale of government shares in state-run companies as economic growth slows to less than 5 percent this fiscal year, from near double digits before the 2008 global crisis.

However, the subsidy bill - mainly for selling oil, fertiliser and food at cheaper rates - is likely to touch near 3 trillion rupees, against a budgeted target of 2.21 trillion rupees.

The fiscal deficit reached 5.16 trillion Indian rupees during April-December, or 95.2 percent of the full-year target, compared with 78.8 percent a year earlier, government data showed on Friday.

Net tax receipts were at 5.18 trillion rupees in the first nine months of the current fiscal year to March 2014, while total expenditure was 11.64 trillion rupees.

Factory gate duties were down 6.9 percent at 1.02 trillion rupees during April-December from the year-earlier period, while customs tax receipts rose 4.3 percent to 1.24 trillion rupees - much lower than the 13.6 percent annual growth target.

Analysts and the central bank remain concerned about widening oil subsidies as the government has only partially increased diesel and cooking gas prices.

"(The government) needs to strive for a deft balance between fiscal consolidation and economic growth by focusing on quality of government spending," the Reserve Bank of India said in its quarterly report earlier this week.

Finance Minister P. Chidambaram, who has committed not to cross the deficit target, finds it hard to either raise diesel and cooking fuel prices or cut the fertiliser subsidy, as the government faces a national election by May.

"The budget deficit had almost hit its full-year target by November and is unlikely to hold below the government's target shortfall of 4.8 percent of GDP," Moody's Analytics said in a research note last week.

Officials say deficit would be met by cutting funds for ministries like rural, urban development, defence and education as India cannot afford a downgrade by ratings agencies. India's deficit is the highest among the BRICs nations of Brazil, Russia, India, China as well as South Africa.

The government also plans to defer some subsidy payments to next year, while focusing on speeding up the sale of stakes in state-run firms and minority stakes in some private companies.

It has raised only 50.98 billion rupees so far this fiscal year from the share sales against a budgeted target of 540 billion rupees.

POLITICAL PRESSURE

After taking charge in August 2012, Chidambaram had cut down investment spending by nearly 1 trillion rupees, which helped contain the fiscal deficit at 4.9 percent of GDP in 2012/13 against an earlier estimate of near 6 percent.

But ahead of the elections, Chidambaram is under political pressure from the ruling Congress party to allocate funds liberally to woo voters.

On Thursday, Prime Minister Manmohan Singh's cabinet rolled back an earlier decision to rein in the subsidy bill by raising the number of subsidised cooking gas cylinders for households at the demand of the ruling Congress party's vice president, Rahul Gandhi.

It is likely to increase the annual cooking fuel subsidy bill by 50 billion rupees to 850 billion rupees.

While recognising Chidambaram's efforts to resist political pressure, the ratings agencies warn against the temptation to rain cash on voters in the lead-up to the May election.

"No doubt there will be some of this, but too much largesse risks blowing out the budget deficit and could add to financial market volatility," Moody's Analytics said last week.

(Additional reporting by Rajesh Kumar Singh; Editing by Angus MacSwan and Chris Gallagher)

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