October 25, 2013 / 2:50 AM / 5 years ago

BREAKINGVIEWS-India's subsidy shuffle is futile gimmickry

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Andy Mukherjee

SINGAPORE, Oct 25 (Reuters Breakingviews) - India’s finance minister may fall back on a tried-and-tested accounting gimmick to create the illusion he is hitting his fiscal targets. Though Palaniappan Chidambaram’s ploy won’t fool savvy investors, it is nonetheless politically convenient. It will shift the deficit burden by one year, by which time it may have become another government’s headache.

Chidambaram, who has staked his reputation on taming India’s notoriously wayward federal budget, may shift as much as $15 billion of subsidy payments into next year’s accounts, Reuters reported on Oct. 25. That’s almost 17 percent of this year’s projected fiscal deficit.

India’s government recognizes revenue and costs not when it actually incurs them, but when it writes or receives cheques. By simply delaying payments, New Delhi can therefore give the impression it is sticking to its promise of keeping this year’s budget deficit within 4.8 percent of GDP.

In reality, though, handouts of food, fertilizer and energy may cost almost 1 percentage point more this year than Chidambaram has provided for. Meeting the deficit target without touching India’s ever-expanding welfare state before next year’s election makes it expedient to delay recognising some of these costs.

Politics isn’t the only constraint, though. Amidst faltering income growth and tax collections, the economics of austerity is equally unpleasant. In the first five months of the fiscal year, the Indian government’s net tax revenue grew 5 percent, compared with the full-year target of 19 percent.

If total government receipts, including proceeds from telecom spectrum auctions and state asset sales, fall short by 1 percent of GDP, Chidambaram will have to rein in year-on-year expenditure growth to 5.5 percent in the remainder of the fiscal year, from the current pace of 17 percent, according to Morgan Stanley. Only then can he hit his deficit goal in an honest way.

A severe expenditure squeeze may worsen the economic slowdown and upset voters. By contrast, the benefits of accelerated fiscal consolidation, such as slower inflation, lower interest rates and a pickup in private credit, would be reaped by the next administration.

Opinion polls currently suggest the Congress Party-led coalition will struggle to retain power for a third term. In such an environment, it would be irrational for Chidambaram to cut spending drastically - or genuinely.

CONTEXT NEWS

- Indian Finance Minister Palaniappan Chidambaram, finding it hard to rein in subsidies on food, fertilizers and energy, may sweep as much as $15 billion of handouts into next year’s accounts, Reuters reported on Oct. 25, citing an official who declined to be identified.

- The move would allow India to meet Chidambaram’s fiscal deficit target of 4.8 percent of GDP for the current fiscal year which will end in March 2014.

- The federal government’s fiscal deficit for the year ended March 2013 was 4.9 percent of GDP, down from a revised estimate of 5.2 percent.

- Reuters: India eyes $15 bln rollover of subsidy costs into next budget

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(Editing by Peter Thal Larsen and Katrina Hamlin)

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