India May Curb Widest BRIC Budget Gap for Rate-Cut Room: Economy

By Unni Krishnan and Kartik Goyal - Feb 26, 2013

India’s government may curb spending growth in the budget tomorrow to pare the widest fiscal deficit in major emerging nations, seeking to boost the central bank’s scope to reduce interest rates as the economy falters.
Finance Minister Palaniappan Chidambaram will keep deficit goals set in October of 4.8 percent of gross domestic product for the year through March 2014 and 5.3 percent in 2012-2013, Goldman Sachs Group Inc. and Credit Suisse Group AG said.
The government has stepped up efforts to avert a credit- rating downgrade and damp inflation of almost 7 percent under policy changes since September. To avoid political repercussions from restrained expenditure, Chidambaram could allocate initial funds for a plan to give poor people cheap food, according to State Bank of India, the nation’s largest lender by assets.
“Moderating the subsidy bill will help the Reserve Bank of India to lower rates, boosting private-sector borrowing,” said Taimur Baig, the director of Asia economics at Deutsche Bank AG, who previously worked at the International Monetary Fund. “But we need to see if the government keeps to its fiscal road map as the year progresses.”
Benchmark 10-year bond yields have slid 23 basis points in 2013 to 7.82 percent as Chidambaram strives to preserve India’s investment-grade rating. The rupee has strengthened 1.7 percent versus the dollar in the period to 54.095, paring its loss in the past 12 months to 9 percent. The BSE India Sensitive Index (SENSEX) of stocks has slipped 2.1 percent this year.
Chidambaram’s target is a 3 percent shortfall by 2017. He is due to present at 11 a.m. tomorrow the government’s last full budget ahead of a general election due by 2014. The finance minister will unveil his plan in parliament in New Delhi.

Railway Fares

The administration said yesterday it intends to link rail passenger fares and freight rates to fuel prices for the first time, in a bid to reduce more than $4.5 billion of losses at Indian Railways, Asia’s oldest network.
Morgan Stanley estimates total government expenditure will climb 9.5 percent to 16.1 trillion rupees ($298 billion) in 2013-2014, less than the 12.9 percent increase in the current fiscal year. It predicts subsidies will fall 8.6 percent to 2.6 trillion rupees.
Sales of shares in state-owned companies, auctions of telecom spectrum and a climb in tax revenues will also help contain the deficit, according to Morgan Stanley’s projections.
India intends to raise 350 billion rupees next fiscal year by disposing of stakes in companies including Coal India Ltd., Indian Oil Corp., Engineers India Ltd., Power Grid Corp. of India Ltd. and Bharat Heavy Electricals Ltd., two Finance Ministry officials said this month, asking not to be identified as the plan isn’t public.

Record Borrowing

The nation plans gross market borrowing of about 6 trillion rupees in 2013-2014, a record high, according to three Finance Ministry officials with knowledge of initial estimates. They also requested anonymity as the details aren’t public.
Oil subsidies will drop 41 percent after diesel prices were partially freed from state control last month, Morgan Stanley’s figures show. The savings may help fund supplies of rice, wheat and millet in the pending National Food Security Bill.
The bill aims to provide grains to more than 60 percent of India’s 1.2 billion people. About two-thirds of the population lives on less than $2 per day, based on World Bank data.
India’s GDP will rise 5 percent in 2012-2013, the weakest pace in a decade, the statistics agency forecasts. Price pressures, a drop in exports and cooling investment hurt growth.

Credit Rating

“The government should, and I guess will, resist any temptation to be overly populist as the chips are stacked against them,” said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. Excessive spending may threaten India’s investment-grade credit rating, he said.
India has the widest fiscal gap in the BRIC group of large emerging countries, which also includes Brazil, Russia and China. Standard & Poor’s and Fitch Ratings warned last year they may strip the nation of its investment-grade rating.
The Reserve Bank has signaled the fiscal gap and a record shortfall in the current account limit its room to lower borrowing costs. It reduced the repurchase rate to 7.75 percent from 8 percent on Jan. 29, the first cut since April 2012.
The central bank in a Jan. 28 report indicated a push to pare the deficit that increasingly relies on sales of shares in state-owned companies and one-off auctions of telecom permits may be unsustainable.
Prime Minister Manmohan Singh has changed policies since September to revive expansion, including steps to open retail and aviation to more foreign investment, ease caps on capital inflows and accelerate infrastructure projects.

Policy Momentum

The reforms will help boost Indian expansion to 6 percent in the year through March 2014, the IMF forecasts. That would remain below the past decade’s average of about 8 percent.
“The current macro backdrop warrants a reduction in the fiscal deficit,” said Chetan Ahya, an economist at Morgan Stanley in Hong Kong. “The government also needs to ensure momentum in policy measures to accelerate investment.”
Elsewhere in the region, New Zealand’s annual trade deficit unexpectedly widened in January on reduced sales of dairy products, a report showed today.
Hong Kong may report economic growth accelerated to 2.4 percent in the fourth quarter from a year earlier, rising from 1.3 percent in the previous three months, according to a Bloomberg survey ahead of a report due today. Thailand may say exports gained for a fifth straight month in January, according to a separate survey.
In Europe, Italian business confidence figures for February are due, while France will release its consumer confidence indicator. The U.S. will report data for durable goods orders in January and mortgage applications for the week ended Feb. 22.
To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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