India’s Chidambaram Outlines Deficit Plan Before RBI Policy.

India unveiled a road map to curb its budget deficit to the least in nine years by 2017, a move seen as a bid to persuade the central bank to cut interest rates in its monetary policy review tomorrow.

The government will gradually reduce fiscal deficit to 3 percent of gross domestic product in the 12 months through March 2017 starting from 5.3 percent in the current year that began April 1, Finance Minister Palaniappan Chidambaram said in a briefing in New Delhi today to outline a fiscal consolidation path.


He reiterated the goal of raising money from the sale of shares in state companies and an auction of telecom permits.


India began an overhaul of economic policy last month, including fuel-subsidy curbs to pare a deficit that has put the nation’s investment-grade credit rating at risk. The central bank, due to announce its interest-rate decision tomorrow, has signaled that curbing the shortfall would boost room for a reduction in borrowing costs to revive growth.


“This is an attempt to create space for a favorable monetary policy response tomorrow,” said Shubhada Rao, chief economist in Mumbai at Yes Bank Ltd. “The government has reiterated its commitment toward fiscal discipline and keeping slippage to manageable levels.”


The rupee has strengthened more than 2.5 percent against the dollar since Sept. 13, when the government announced an increase in diesel prices and limited the supply of subsidized cooking gas. It opened industries including retail to more foreign investment the next day.
Flagship Programs


The currency weakened 0.7 percent to 53.95 per dollar as of 3:06 p.m. in Mumbai, while the BSE India Sensitive Index (SENSEX) of stocks was little changed. The yield on the 10-year bonds due June 2022 stayed at 8.13 percent.


“The burden of fiscal consolidation should be shared fairly and equitably by different classes of stakeholders,” Chidambaram said today. “The poor should be protected and others must bear their fair share of the burden. All flagship programs designed to help the poor and bring about inclusive development will be fully protected under the revised fiscal consolidation plan.”


The Reserve Bank will leave the repurchase rate at 8 percent for a fourth meeting, 19 of 33 economists said in a Bloomberg News survey before tomorrow’s policy decision, while 13 predict a cut to 7.75 percent and one to 7.5 percent.

“The ball is now in the RBI’s court,” Arvind Mayaram, Economic Affairs Secretary, told reporters after the finance minister’s briefing. “The government has decided on what it has to do, now they have to take a call.”
Panel Recommendations

Chidambaram said he accepted some of the recommendations of a panel he set up to study ways of containing the budget gap. At 3 percent, the deficit will be the lowest since the year through March 2008, when the shortfall was 2.5 percent of GDP.

The panel, headed by Vijay Kelkar, recommended subsidy cuts and faster sales of shares in state-owned companies, steps it said would help limit the shortfall at 5.2 percent.

The deficit may widen to 6.1 percent if no action is taken, the panel said, a level termed “unacceptable” by Chidambaram.

India’s goal is to narrow the budget gap from 5.8 percent of GDP in the last financial year.

In the March budget, it originally set a target of 5.1 percent for 2012-2013. Slower growth has hurt tax revenue while subsidies have stoked spending, exacerbating the shortfall. Standard & Poor’s projects the deficit will widen to about 6 percent of GDP this year.


The finance minister said he is confident that capital inflows will fully finance India’s current-account deficit, adding he is committed to reviving faster economic expansion.


Asia’s No.3 economy expanded 5.5 percent in the three months through June from a year earlier, close to the 5.3 percent pace of the previous quarter that was a three-year low.


S&P and Fitch Ratings reduced the outlook on India’s credit rating to negative from stable earlier in 2012, bringing the nation a step closer to junk status on risks such as the fiscal imbalance and a trade deficit.


Source : bloomberg.com