Unfunded budget items store up trouble for India

By Charlotte Cooper and Surojit Gupta

NEW DELHI (Reuters) - India's 2008/09 budget is storing up public finance problems for the future, economists say, with its $15 billion loan write-off for farmers and no provision for a potentially huge increase in civil service pay.

Last Friday's budget focused spending on the flagging farm economy and the communist-backed coalition's main policy targets such as the alleviation of poverty, and it gave a tax stimulus to some manufacturing sectors to sustain consumption and growth.

But economists said details on how the massive debt write-off would function were conspicuous by their absence, and the impact of this, along with the pay rise for government workers and rising food and fertiliser subsidies, would widen the fiscal gap.

"What is hidden is more important than what is revealed," M. Govinda Rao, a member of the prime minister's Economic Advisory Council, told a meeting of economists this week.

India must hold a general election by May 2009 and several states go to the polls this calendar year, which will test the ruling Congress party's popularity before the national vote.

"Whichever government comes to power will have to face fiscal challenges," Rao said.

According to the government, the federal fiscal deficit will fall to 2.5 percent of gross domestic product in fiscal 2008/09, which starts on April 1, from an estimated 3.1 percent this year.

That means India will have fulfilled a legal requirement to reduce the shortfall to 3.0 percent of GDP by the end of 2008/09.