* India set 2012/13 fiscal deficit target of 5.3 pct of GDP
* Private sector economists forecast deficit closer to 6 pct
* S&P; warned in October of 1-in-3 chance of downgrade to
“junk”
* Government facing shortfall in proceeds from share sales,
mobile auction
By Ross Colvin and Rajesh Kumar Singh
NEW DELHI, Nov 26 (Reuters) – India’s finance minister has
banned government officials from holding conferences at
five-star hotels, restricted travel and ordered a freeze on
hiring to fill vacant posts.
A single-minded political veteran who commands both fear and
respect in Indian officialdom, P. Chidambaram is squeezing
government ministries hard to cut spending wherever they can,
and quickly, to help rein in a widening fiscal deficit.
He is a man under pressure and with an eye on the clock.
Four weeks ago to the day, he set himself an ambitious
target: to hold the government’s fiscal deficit for 2012/2013
to 5.3 percent of gross domestic product, even as sceptical
private economists forecast a deficit closer to 6 percent.
But a series of revenue-raising setbacks since Oct. 29 now
means it will be almost impossible for the government to meet
that target, economists say, and some finance ministry officials
privately agree. That increases the risk that credit rating
agencies could downgrade India to junk in the coming months.
“This has taken on a very great sense of urgency,” said
Rajiv Biswas, chief Asia economist at market information and
analytics company IHS, as he called on Chidambaram to draw up a
credible medium-term road-map for cutting the deficit.
The deficit reduction plan unveiled by Chidambaram last
month was panned by economists for being short on specifics and
putting a firewall around fuel subsidies and expensive social
welfare programmes for the country’s millions of poor.
A month earlier a deficit reduction panel appointed by
Chidambaram had urged the government to cut such spending. Their
language was dramatic: India was on the edge of a “fiscal
precipice” and the economy was “flashing red lights”, they said.
“BAND-AID APPROACH”
The government is pursuing a “band-aid approach” to deficit
reduction, favouring quick fixes instead of implementing
structural reforms to slash the deficit, said economist Rajeev
Malik of CLSA in Singapore, who is sticking to a deficit
forecast of 6 percent of GDP.
Financial markets are already expecting the Indian
government to overshoot its target and hit around 5.6 percent of
GDP, which helped push benchmark 10-year bond
yields to the highest in nearly three months late last week.
But the big unknown is the response of the rating agencies,
which have repeatedly warned India to get its finances in order.
The agencies are unlikely to reveal their thinking until
after Chidambaram unveils his budget in February, analysts said.
But in October, Standard & Poor’s said India still faced a
one-in-three chance of a downgrade within the next 24 months.
Such an outcome would hurt investor sentiment and push up
overseas borrowing costs for Indian companies.
Chidambaram, 67, a lanky politician with a disarming smile
that belies a sharp tongue and an intolerance for time-wasting,
charmed financial markets with his can-do attitude and burst of
economic reforms in September, after years of policy inaction by
Prime Minister Manmohan Singh’s weak coalition government.
India’s benchmark BSE index rallied more than 6
percent after the reforms were announced in mid-September. But
concerns over implementation, the fiscal deficit and falling
foreign fund inflows have since pushed it down 3.3 percent.
“We believe that this is the beginning of the realization
that a sustainable turnaround in India’s growth prospects would
require considerable effort, well beyond the burst of measures
seen in September,” Deutsche Bank said last week in an analyst
note headlined “Reality Check”.
MAN ON A MISSION
Chidambaram’s deficit reduction plan banks heavily on
raising billions of dollars by auctioning off cellphone airwaves
and selling shares in state companies.
Neither effort is going particularly well.
The government raised less than a quarter of its 400 billion
rupee ($7.3 billion) target in a 2G spectrum auction in
mid-November. A second auction is planned before March, but a
senior government official told Reuters there would likely be at
least a 200 billion rupee shortfall.
India succeeded in raising 8.1 billion rupees ($147 million)
by selling shares of state-run Hindustan Copper Ltd on
Friday, although the deal was supported by buying from state
institutions.
To put the deal in context: New Delhi aims to raise 300
billion rupees by selling shares in state companies this fiscal
year, which ends in March. Excluding the latest sale, it has
managed just 1.25 billion rupees so far.
The government is staring at an overall shortfall of nearly
500 billion rupees in revenues this year, the government
official said, speaking on condition of anonymity because of the
sensitivity of the subject. This may require additional
borrowing from the market.
Chidambaram’s battle to tame the deficit takes place against
the backdrop of a continued economic slowdown, and a fractious
parliament where the government has lost its majority after its
biggest coalition ally withdrew support to oppose its reforms.
Manufacturing is contracting and exports are falling.
India’s October trade deficit of nearly $21 billion was its
worst on record.
And a second round of reforms aimed at liberalising the
pension and insurance sectors has fallen victim to gridlock in
parliament. It is not clear if the measures, long sought by
investors, will be passed in the current winter session.
But Chidambaram, who began his second stint as finance
minister in August, gives no appearance of being disheartened
and as recently as Saturday was confidently predicting he would
be able to contain the deficit to 5.3 percent of GDP.
Inside his ministry, officials said the target looks
daunting but they have had no word of a revision from the
minister. Instead, he has intensified pressure on them to find
ways of meeting the target, they said.
Chidambaram’s credibility is not yet on the line, said
analysts. In fact, perhaps the opposite. His credentials as an
economic reformer during two previous stints as finance minister
are buying him time to pull India back from the fiscal
precipice.
(Addtional reporting by Frank Jack Daniel in NEW DELHI, Swati
Bhat, Sumeet Chatterjee and Subhadip Sircar in MUMBAI; Editing
by Alex Richardson)
