Deficit plan fails, India downgrade looms

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 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

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