Finance Minister P Chidambaram is planning to cut the public spending target for fiscal 2013-14 by up to 10% from this year’s original target, in what would be the most austere Budget unveiled in recent history as he tries to avert a sovereign credit downgrade.
Chidambaram has already slashed actual public expenditure in the current fiscal year that ends in March by some 9% from the original target. So the plan for 2013-14 would in effect keep a lid on spending, limiting it to a similar rupee level or slightly higher.
Final figures have not yet been worked out. But several officials involved in preparations for the Budget to be unveiled on February 28 told Reuters that Chidambaram is determined to rein in the fiscal deficit, having won reluctant agreement from leaders of his Congress party who had wanted a spending spree ahead of the general election due by next May.
Top Congress leaders, including party chief Sonia Gandhi, did not show up for a pre-Budget briefing by Chidambaram on Thursday, signalling that they had fallen in line with his plan, a senior party official told Reuters.
Critics warn that at a time when both private investment and consumer demand are weak, lower public spending risks deepening India’s sharpest economic slowdown in a decade. Growth in 2012-13 is estimated at 5%, the lowest since 2002-03.
But Chidambaram has argued that a lower fiscal deficit will not only avert a rating downgrade threat, but also bolster economic growth prospects as borrowing costs for private investors will fall, helping lift capital investment growth from a five-year low. He told party colleagues at Thursday’s briefing that he was confident of taking growth back to 6-7% in 2013-14.
New Delhi missed its 2011-12 fiscal deficit target of 4.6% of gross domestic product by 1.2 percentage points, prompting threats of a downgrade from ratings agencies Fitch and Standard & Poor’s.
India has a BBB minus rating with a negative outlook from both S&P and Fitch, the lowest investment grade among the BRIC group of large emerging economies. A cut would take the country’s credit rating to junk status.
In a measure of what Chidambaram is aiming to achieve by placing a lid on expenditure, spending for the 2012-13 Budget was increased by 13% compared with actual spending in 2011-12.
“Our first and foremost priority is to avoid a ratings downgrade,” said one of Chidambaram’s lieutenants, adding that a downgrade would further dent corporate investment