Analysis: Optimistic India budget jars with revenue reality

Sun Mar 3, 2013 4:07pm EST
 
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By Tony Munroe and Suvashree Dey Choudhury

NEW DELHI (Reuters) - Staking his credibility on meeting a deficit-cutting target, Indian Finance Minister P. Chidambaram is likely to be forced to scale back spending in the upcoming fiscal year after delivering a federal budget that makes aggressive revenue assumptions.

Cutting expenditure would pit Chidambaram against the ruling Congress party's urge to ramp up populist spending ahead of elections due in 2014, and risks exacerbating a dramatic slowdown in Asia's third-largest economy.

Instead of slashing spending, as had been expected, Thursday's budget for the financial year starting next month bets on an increase in revenue to fund a 16 percent rise in expenditure and trim the fiscal deficit to 4.8 percent of GDP.

For that to happen, India's sputtering economy must accelerate to roughly 6.5 to 7 percent growth from the current fiscal year's expected 5 percent -- a decade-low and a disappointment for a country that not long ago aspired to double-digit expansion.

The budget also assumes that India will manage to sell about $10 billion worth of government stakes in companies and generate $7.5 billion in revenue from the battered telecoms sector.

It also envisions capping subsidies at 2 percent of GDP, from 2.6 percent this year, a limit that rating agency Standard & Poor's warned could be breached.

Keeping a lid on spending, however, is where Chidambaram may be able to deliver.

Against the populist leanings of his party, Chidambaram has managed to curb expenditure in the final months of the current year, putting India's fiscal deficit on track to fall to 5.2 percent, better than its revised 5.3 percent target.   Continued...

 
India's Finance Minister Palaniappan Chidambaram (C) arrives at the parliament to present the 2013/14 federal budget in New Delhi February 28, 2013. REUTERS/Adnan Abidi