Deficit plan fails, India downgrade looms

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Chidambaram (Reuters) Chidambaram (Reuters)
SummaryChidambaram banned govt officials from five-star hotels, cut travel and stopped hiring.

Highlights

* 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

Finance minister P Chidambaram 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

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