Exclusive: Slowing Indian economy may force Chidambaram to wield budget knife

Thu Oct 3, 2013 8:27am EDT
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By Manoj Kumar and Rajesh Kumar Singh

NEW DELHI (Reuters) - India's finance minister may have to slice at least 200 billion rupees ($3.2 billion) from government spending to prevent a budget blow-out, which could threaten to send the country's credit rating into "junk" status, two ministry officials said.

P. Chidambaram will make a final decision on whether to go ahead with the cuts at the end of October, when he gets an update on revenue collections, the officials, who have direct knowledge of the process, said.

If he goes ahead with cuts, the minister would likely focus on areas of discretionary spending but keep programmes, such as food subsidies, in place as state and national elections near, these officials said.

Chidambaram, who last year oversaw cuts worth over 1 trillion rupees, is aiming to prevent the budget for the fiscal year to March 2014 from stretching beyond a deficit target of 4.8 percent of GDP.

A budget blow-out would be a concern for credit ratings agencies. India has the lowest investment grade rating and Standard & Poor's maintains a negative outlook. A cut to "junk" status would raise its borrowing costs and could trigger further panic on financial markets after the rupee fell as much as 20 percent this year and the economy posted its weakest growth in years.

The officials said that Chidambaram had briefed federal officials on September 17 on the need for prudent spending, even though in public he has said that the budget remains on target.

"With oil subsidies up by about 300 billion rupees, the government may have to cut expenditure by around 200 billion rupees in addition to usual savings of around 300 billion rupees at the end of the year," said a senior finance ministry official.

Doubts that economic growth and tax receipts will match budget assumptions, and slow government asset sales also pointed to the need for spending cuts, the officials said.   Continued...

India's Finance Minister Palaniappan Chidambaram smiles during a news conference in New Delhi July 31, 2013. REUTERS/Adnan Abidi