A recovery in the rupee is giving Finance Minister P. Chidambaram rare relief in his battle against a threatened credit rating downgrade to junk status by reducing pressure on the government's subsidy bill.
Still, the minister can only meet his fiscal deficit target of 4.8 percent of GDP by rolling over a substantial amount of subsidy spending into next year's budget and by finding big savings elsewhere, two senior finance ministry officials said.
But a 10 percent rise in the rupee - which slumped to a record low late in August - means Chidambaram can at least reduce the amount of subsidy spending that gets pushed into next year's budget to $12 billion from a previous estimate of $15 billion, these officials said.
Other budget headaches mean he will have to find about $8 billion in savings from budgeted spending plans to meet the deficit target, they said.
The sources, who have direct knowledge of the budget issues or have been briefed on them, declined to be identified because the revised budget numbers are not yet public.
"Chidambaram wants to put the house in order before the 2014 election campaign kicks off and the US Federal Reserve begins cutting its monetary stimulus," said one of the officials.
National elections have to be called by May 2014 and emerging markets are on edge as investors speculate on when the U.S. central bank might reduce its economic stimulus, which could prompt capital to shift into U.S. assets.
A finance ministry spokesman declined to comment on the budget estimates other than saying revised figures are still being worked out.
Chidambaram has said the fiscal deficit target is a line that will not be crossed as he seeks to fend off the threat from Standard & Poor's to downgrade India's sovereign credit rating, currently clinging to the bottom rung of investment grade.
The budget is under pressure on a number of fronts; subsidy spending on fuel, food and fertiliser has blown out, economic growth has slumped to its weakest level in a decade and a programme to sell state assets is in tatters.
The government had initially budgeted spending of about $36 billion