India May Unveil Biggest Budget Deficit Since 1991 Amid Slump
India may unveil its biggest budget deficit in 18 years as the government increases spending to protect the economy from the global recession ahead of elections in two months.
The shortfall may widen to 6.5 percent of gross domestic product in the year ending March 31, almost three times the government’s target of 2.5 percent, according to Macquarie Capital Securities. Citigroup Inc. estimates a 6.3 percent gap. The budget will be presented today in parliament in New Delhi.
Prime Minister Manmohan Singh’s government says spending to revive the economy is more important now than worrying about the deficit. The largest budget shortfall since 1991 may prompt rating companies to lower their assessments of India’s credit worthiness, spooking foreign investors who are already retreating from emerging markets.
“It is essential to improve public finances,” said James McCormack, head of Asia sovereign ratings at Fitch Ratings in Hong Kong. “Failure to do so could undermine India’s economic growth prospects and put at risk its ability to continue to attract international capital flows, which have had an important role in financing its development.”
India received an average $10 billion of foreign investments between 2001 and 2003. Inflows from companies including General Motors Corp. and Royal Dutch Shell Plc. increased to $108 billion in the 12 months to March last year, helping the economy grow at a record average pace of 9.3 percent in the three years to March 2008, Morgan Stanley economist Chetan Ahya said.
Job Losses
The government has said growth in the current financial year may slow to 7.1 percent, the weakest since 2003, rendering millions jobless. Exporters may cut 10 million jobs by next month, according to the Federation of Indian Export Organisations. The International Labor Office says India’s economy must grow at 10 percent a year to increase employment by one percent.
Prime Minister Singh’s government, seeking a re-election in polls that are scheduled to be held in April and May, wrote off 717 billion rupees ($14.7 billion) of farm loans and raised the salaries of 5 million government employees by 21 percent in the past nine months. Since December, it has cut taxes and announced an extra 200 billion rupees of spending to boost the economy.
That’s straining government finances because the economic slowdown is also putting the brakes on tax collections. India’s personal and corporate tax revenue was 2.47 trillion rupees between April and January, compared with a target of 3 no teletrack payday loan.65 trillion rupees by March 31, according to the tax department.
‘Worsened Significantly’
The government last week said it will sell 460 billion rupees of additional debt in the year to March 31, 2009. The government has raised 2.4 trillion rupees through the sale of securities this financial year, compared with the 1.79 trillion rupees budgeted earlier, according to the central bank.
“India’s fiscal dynamics have worsened significantly in the last few months,” said Rajeev Malik, a Singapore-based economist at Macquarie. “It could trigger the wrath of the credit rating agencies.”
Malik estimated the federal government’s budget deficit could touch 8.1 percent of GDP if the government includes bonds sold during the year to subsidize fuel and fertilizer in its books. India regards these bonds as “off-budget” items and does not show them in state accounts.
Fitch last week maintained India’s credit rating at BBB-, its lowest investment grade, because of rising debt that it estimates at about 80 percent of GDP. Standard & Poor’s also places India’s credit rating in its lowest investment category.
New Government
Today’s statement in parliament will include initiatives for the first four months of the next fiscal year that starts April 1, as well as spending and revenue estimates for the full year ending March 31, 2010. These figures will be revised when the new government announces its budget after assuming office in May.
Still, Suresh Tendulkar, the top economic adviser to Prime Minister Singh, says “limitations in the fiscal space” put the onus of supporting India’s growth on monetary policy.
India’s central bank kept interest rates unchanged in its scheduled policy review on Jan. 27 after reducing them to an unprecedented low on Jan. 2. The repurchase rate, which has been cut four times since October, is 5.5 percent and the reverse repurchase rate is 4 percent.
“The central bank must see the implications of the borrowing program before it next sets rates,” Tendulkar said. “They have to figure out how to maintain adequate liquidity supply in the economy. My guess is they would review rates after seeing the interim budget.”