* Targets fiscal deficit of 3 pct of GDP by 2017
* Central bank seen leaving rates on hold on Tuesday; may
cut CRR
* Finance minister offers no concrete plans
* Programmes for the poor to be ring-fenced
* Central bank lauds reforms but says more needed
(Adds details from central bank review)
By Rajesh Kumar Singh and Tony Munroe
NEW DELHI/MUMBAI, Oct 29 (Reuters) – India’s government
vowed on Monday to rein in the country’s hefty fiscal deficit,
increasing the pressure on the central bank on the eve of its
next policy meeting to cut interest rates for the first time
since April.
Finance Minister P. Chidambaram pledged to nearly halve its
fiscal deficit by March 2017 in a bid to avoid a credit rating
downgrade and persuade the central bank to lower rates, but
offered few concrete steps.
The Reserve Bank of India, which has kept interest rates on
hold as it worries about persistent inflation and the country’s
fiscal deficit, said on Monday that recent reforms by New Delhi
mark a step in the right direction, but more was needed.
Still, the RBI’s language was less hawkish than in the
recent past, as it said inflation pressure was likely to
moderate starting in the January-March quarter, a sign it may
soon be ready to ease rates.
“As macro-risks from inflation and twin deficits recede
further, that could yield space down the line for monetary
policy to respond more effectively to growth concerns,” the
Reserve Bank of India wrote in its review of macroeconomic and
monetary developments for the July-September quarter.
The twin deficits refer to India’s fiscal and current
account deficits.
At a press conference on Monday that was unusual for the
haste at which it was called and the timing – one day ahead of
the RBI’s policy review – Chidamabaram unveiled a fiscal
consolidation plan that did not say how New Delhi aimed to rein
in a ballooning subsidy bill.
Higher spending on fuel, food and fertilizer subsidies along
with sluggish tax revenues has led many economists to forecast a
fiscal deficit this current fiscal year of about 6 percent of
GDP. Chidambaram said India’s fiscal deficit would come in at
5.3 percent, up from New Delhi’s earlier target of 5.1 percent.
“We do not have an option,” Chidambaram said, promising to
reduce the deficit to 3 percent of GDP by March 2017. The
deficit last year was 5.8 percent.
While most economists in a Reuters poll on Oct. 19 said they
did not expect the RBI to cut its policy repo rate
on Tuesday, nearly half forecast that it would cut the cash
reserve ratio, or the share of deposits banks must
maintain as reserves with the central bank.
That was before Monday’s press conference by Chidambaram,
who pointedly said that he hoped the central bank would take
note of the government’s efforts to trim the deficit.
“We have upped the probability of a rate cut tomorrow,
largely based on the hurried press conference in the morning.
That could be construed as a cue for the RBI,” said Abheek
Barua, chief economist at HDFC Bank.
While the RBI is not statutorily independent, it has tended
to enjoy a high degree of autonomy, and Subbarao has resisted
pressure in the past from New Delhi to ease policy.
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New Delhi has unveiled a slate of reform measures since
Chidambaram was installed as finance minister nearly three
months ago as the government seeks to revive growth that had
stalled dramatically under his predecessor, Pranab Mukherjee.
Those moves include raising the price of subsidised diesel
and easing foreign direct investment in several industries,
including supermarkets and airlines, all of which has won
guarded praise from the RBI.
“The announcement of these reform measures in themselves are
not sufficient to ensure recovery as their impact would
critically hinge on successful implementation,” the RBI wrote on
Monday.
India’s policy interest rate of 8 percent is among the
highest among major economies, and the central bank has resisted
pressure from government and industry to lower rates.
“A credible fiscal consolidation strategy is now on the
anvil but needs to be backed by further measures,” the RBI said.
Under Chidambaram’s plan, the government will focus on
economising existing expenditure, reducing waste, and increasing
revenue from share sales in state-run companies.
Financial markets were disappointed by a lack of specifics.
“In our view, the measures announced will be insufficient to
contain the fiscal deficit at 5.3 percent of GDP in FY13 due to
higher subsidies and lower tax revenues,” wrote Nomura
economists, adding that they did not expect a Tuesday rate cut.
“The timing of these announcements (one day ahead of the RBI
policy meeting) also suggests growing political pressure on the
RBI to cut rates tomorrow,” Nomura said.
‘FISCAL PRECIPICE’
A government panel said last month India was teetering on a
“fiscal precipice,” calling on the government to slash its
subsidy bill to get the deficit under control.
But cutting subsidies could be politically perilous for the
populist ruling Congress party ahead of state and federal
elections, and Chidambaram stressed that all programmes to help
India’s poor would be protected under the consolidation plan.
The International Monetary Fund this month slashed its
economic growth forecast for India for 2012 to 4.9 percent from
6.1 percent previously. Rating agency Standard & Poor’s said the
country faces a one-in-three chance of a credit rating downgrade
to junk over the next two years.
“The ball is now in the RBI’s court,” said Arvind Mayaram,
India’s economic affairs secretary, when asked whether he
expected the RBI to follow the fiscal steps with a rate cut.
(Additional reporting by Arup Roychoudhury and Henry Foy in NEW
DELHI and Shamik Paul and Neha Dasgupta in MUMBAI; Editing by
Alex Richardson)
