Budget 2013: India to put investors before voters in pre-election year

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Chidambaram has staked his reputation on meeting deficit cutting targets. (Reuters) Chidambaram has staked his reputation on meeting deficit cutting targets. (Reuters)
SummaryChidambaram has staked his reputation on meeting deficit cutting targets.

India's finance minister had a bruising battle with cabinet colleagues in the run-up to the budget he unveils this week, rebuffing demands for pre-election spending and insisting on austerity to shore up investors' faith in a troubled economy.

Aides to P. Chidambaram said the eloquent Harvard-educated lawyer finally convinced leaders of his Congress party that more profligate spending would make a sovereign rating downgrade to 'junk' status inevitable and could trigger an economic meltdown.

In pushing for austerity, officials said Chidambaram met no opposition from Prime Minister Manmohan Singh - architect of the 1991 economic reforms that led to the "Incredible India" story - or from the welfare-minded leader of the Congress party, Sonia Gandhi, pointing to increasing acceptance of the depth of India's economic problems.

"He wants to send out a credible and strong signal that India is on the right track," said one senior official privy to the secrecy-shrouded preparations for the 2013/14 budget. "He apprehends that yet another failure to honour fiscal commitments could end the India story."

Chidambaram has staked his reputation on meeting deficit cutting targets, embarking last month on a road show of financial centres where he sought to reassure foreign investors that India was serious about getting its fiscal house in order.

Several officials involved in budget planning told Reuters that tackling the bloated fiscal deficit will be the centrepiece of Chidambaram's presentation to parliament on Thursday.

They said his budget has also been crafted to avoid unnerving investors, who were dismayed last year by plans to tax merger and acquisition deals retrospectively and clamp down on tax evasion.

Together with a widening fiscal gap, the tax moves triggered a flight of capital from Asia's third-largest economy. The rupee was hammered and, with exports and foreign direct investment slowing, fears of a balance of payments crisis mounted.

New Delhi missed its fiscal deficit target of 4.6 percent of gross domestic product (GDP) in 2011/2012 by 1.2 percentage point because of over-spending on social welfare and subsidies, prompting credit rating agencies to threaten a downgrade that would make India the first of the BRICS emerging economies to lose its investment-grade status.

Chidambaram has repeatedly pledged to lower the deficit to 5.3 percent of GDP this fiscal year and 4.8 percent in 2013/14. But with economic growth languishing around 5.5 percent after the sharpest slowdown in a decade, the finance minister cannot rely on tax revenues to meet his goals.

The finance minister told

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