* FY12 fiscal gap to be "significantly" worse
* Ahluwalia says credibility depends on fiscal correction
* Uncapped petroleum subsidy a "danger"
* Government has "run out of fiscal space"
(Recasts, adds more details, background and quotes)
By Rajesh Kumar Singh and John Chalmers
NEW DELHI, Jan 11 India risks undermining
the credibility of its economic outlook if it fails to reform
its public finances, one of the country's top policy advisers
warned on Wednesday as the cash-strapped government gears for a
dramatic widening of its fiscal deficit.
With a slowing economy, a sharp decline in investment and
high oil prices upsetting its budget calculations, Prime
Minister Manmohan Singh's government is under growing pressure
to curb spending as it heads into the 2012/13 fiscal year.
New Delhi is widely expected to miss by a long chalk its
deficit target of 4.6 percent of GDP for the fiscal year that
ends this March.
Montek Singh Ahluwalia, deputy chairman of the Planning
Commission, said the government must now send out a "credible"
signal through its budget announcement in mid-March to shore up
investors' faith in India's macro-economic fundamentals.
"The markets have to know that the government is not
unconcerned about the fiscal deficit, and I am sure the finance
minister will be aware that the credibility of our macro stance
next year depends upon both the extent and the quality of the
fiscal correction," Ahluwalia said in an interview.
SAME OLD ADAGE
His prescription for reforming public finances is the same
decades-old Indian adage: "contain petroleum and fertiliser
However, tinkering with subsidies has proved too tough for a
succession of governments in a country where welfare schemes for
the poor and subsistence farmers help political parties win
The reformists in the government managed to get gasoline
prices deregulated in June 2010. At the same time, they
succeeded in getting a plan to free up - over a period of time -
prices of diesel, which makes up about 75 percent of fuel
consumption in India.
Since then, however, diesel prices have been raised just
once and the fuel continues to be sold like kerosene and cooking
gas at state-fixed prices.
Ahluwalia conceded that reforming the petroleum subsidy
would not be easy, but said the government must move forward on
this after elections in five states over the next two months.
"If you were to say: 'should the government give a credible
signal?' It is a very tough signal to give. But I agree it
should give a credible signal."
Subsidies have long been the bane of India's public
finances. Spending on subsidies is expected to have risen by 1
trillion rupees ($19.3 billion) in 2011/12 from a budgeted
estimate of 1.3 trillion ($25 billion).
With an economic slowdown hitting revenues, the government
is forced to rely on market borrowing to fund its hefty subsidy
bill. It has already increased its borrowing for 2011/12 by 22
percent from a budgeted 4.17 trillion rupees.
"I am quite sure that the government is very concerned to
convey a sense that, like other countries, we have run out of
fiscal space and we should now begin the process, seriously, of
fiscal consolidation," Ahluwalia said.
BLAME FISCAL PROFLIGACY
India's economic growth has been slowing due to a
combination of feeble growth in the United States and Europe, a
prolonged spell of monetary tightening to tame high inflation,
and a decision-making paralysis in the federal government.
While many government officials blamed the central bank's 13
rate hikes for the deceleration of growth to around 7 percent in
the current fiscal year, Ahluwalia put the blame on fiscal
profligacy that has pushed up the cost of debt for private
"Even if the Reserve Bank of India had not raised the repo
rate, if the fiscal deficit expands, which it did ... this would
have led to a squeeze on credit and higher interest rates."
Investment proposals in India plunged 45 percent to a
five-year low in 2011 as firms halted projects, citing
hassles, a move which could worsen the growth slowdown in 2012,
according to data from the Centre for Monitoring Indian Economy.
Ahluwalia, a close aide of Prime Minister Singh, said the
government is trying to speed up execution of investment
projects by addressing bottlenecks.
"A visible demonstration that there is an accelerated
processing of these projects will send a signal that the
government is actually quite concerned," he said.
GHOST OF 1991
A combination of slowing growth and widening fiscal and
current account deficits is weighing on the Indian rupee. The
rupee was the worst performer among Asian currencies
last year, losing close to 16 percent against the dollar.
This has raised the spectre of a balance of payment crisis
for India like the one it faced almost 20 years ago, when the
central bank was forced to airlift 47 tonnes of gold to Europe
as collateral for a loan to avert a sovereign default.
Ahluwalia, who was involved in navigating the economy out of
that crisis, rejects such concerns as "complete nonsense",
saying the economy is now better equipped to handle any shock
arising from a spike in oil prices.
"Nobody can rule out a balance of payment crisis, if the oil
price shoots up to $150, we will have a balance of payment
crisis," he said. "We have more than enough cushion to take
($1=51.89 Indian rupees)
(Editing by Ron Askew)