RBI Says Weak India Growth Outlook Imperils Budget Deficit Goal

The Indian government may exceed its budget-deficit target because of higher spending on petroleum subsidies and a weak economic growth outlook that could lead to a tax shortfall, the Reserve Bank of India said.

“There is no scope for complacency as fiscal slippage is likely” in the year through March 2013, the central bank said in its annual report released in Mumbai yesterday. The shortfall in the current account, the broadest measure of trade, is set to remain above a sustainable level, it said.

These risks must be tackled “forthwith” to contain threats to economic stability, it said, adding India needs to revive investment in public works to help counter the weakest expansion in nine years. The Reserve Bank left interest rates unchanged in July to fight an inflation rate that has averaged more than 7 percent for most of 2012. It said yesterday that damping price increases remains the “cornerstone” of monetary policy.

“There are significant risks to deficit and revenue targets,” said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. “Standard & Poor’s and Fitch Ratings are watching us closely and if the deficit keeps slipping, then a credit-rating downgrade will be a very credible scenario.”

Finance Minister Palaniappan Chidambaram earlier this month pledged to unveil a road map for fiscal consolidation soon. The government’s target is to pare the budget gap to 5.1 percent of gross domestic product this fiscal year from 5.8 percent in 2011-2012, in part by keeping expenditure on a subsidy program ranging from diesel to fertilizers at less than 2 percent of GDP.

Downgrade Threat

Forecasters from Citigroup Inc. to Crisil Ltd., the local unit of Standard & Poor’s, predict the fiscal deficit will instead widen as economic expansion falters. S&P and Fitch have said they may strip India of its investment-grade rating, citing risks such as the trade and budget imbalances. The current- account gap reached a record 4.2 percent of GDP last fiscal year.

The impact of a below-average monsoon on crops, a drop in the rupee, and the need to raise fuel prices to curb subsidies are among upside risks to inflation, according to the Reserve Bank. Lingering price pressures, even as economic expansion slows, are a “major policy challenge,” the central bank said.

The rupee has slumped about 17 percent against the dollar in the past year. It strengthened 0.4 percent to 55.2550 per dollar in Mumbai yesterday, according to data compiled by Bloomberg. The BSE India Sensitive Index was little changed.

Faltering Recovery

Governor Duvvuri Subbarao left borrowing costs at 8 percent for a second meeting on July 31, breaking with a wave of rate cuts from China to Brazil as a faltering global recovery adds pressure on officials to support economic expansion.

Headline Indian inflation eased to a 32-month low of 6.87 percent last month, while staying the fastest among the biggest emerging markets. Asia’s third-largest economy may expand 6.5 percent in 2012-2013, matching the slowest pace in nine years, the monetary authority forecast last month.

Prime Minister Manmohan Singh is struggling to salvage his development agenda as infighting in the ruling coalition and allegations of graft paralyze policy making. A failure to ease infrastructure bottlenecks has also hurt India’s outlook. Economic conditions are unlikely to improve in the near term, partly due to “policy stasis,” the Reserve Bank said yesterday.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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