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Deficit plan fails, India downgrade looms

Nov 26 2012, 15:34 IST
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Chidambaram (Reuters) Chidambaram (Reuters)
SummaryChidambaram banned govt officials from five-star hotels, cut travel and stopped hiring.

agencies, which have repeatedly warned India to get its finances in order.

The agencies are unlikely to reveal their thinking until after Chidambaram unveils his budget in February, analysts said.

But in October, Standard & Poor's said India still faced a one-in-three chance of a downgrade within the next 24 months. Such an outcome would hurt investor sentiment and push up overseas borrowing costs for Indian companies.

Chidambaram, 67, a lanky politician with a disarming smile that belies a sharp tongue and an intolerance for time-wasting, charmed financial markets with his can-do attitude and burst of economic reforms in September, after years of policy inaction by Prime Minister Manmohan Singh's weak coalition government.

India's benchmark BSE index rallied more than 6 percent after the reforms were announced in mid-September. But concerns over implementation, the fiscal deficit and falling foreign fund inflows have since pushed it down 3.3 percent.

We believe that this is the beginning of the realization that a sustainable turnaround in India's growth prospects would require considerable effort, well beyond the burst of measures seen in September, Deutsche Bank said last week in an analyst note headlined Reality Check.

MAN ON A MISSION

Chidambaram's deficit reduction plan banks heavily on raising billions of dollars by auctioning off cellphone airwaves and selling shares in state companies.

Neither effort is going particularly well.

The government raised less than a quarter of its 400 billion rupee ($7.3 billion) target in a 2G spectrum auction in mid-November. A second auction is planned before March, but a senior government official said there would likely be at least a 200 billion rupee shortfall.

India succeeded in raising 8.1 billion rupees ($147 million) by selling shares of state-run Hindustan Copper Ltd on Friday, although the deal was supported by buying from state institutions.

To put the deal in context: New Delhi aims to raise 300 billion rupees by selling shares in state companies this fiscal year, which ends in March. Excluding the latest sale, it has managed just 1.25 billion rupees so far.

The government is staring at an overall shortfall of nearly 500 billion rupees in revenues this year, the government official said, speaking on condition of anonymity because of the sensitivity of the subject. This may require additional borrowing from the market.

Chidambaram's battle to tame the deficit takes place against the backdrop of a continued economic slowdown, and a fractious parliament where the government has lost its majority after its biggest coalition ally

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