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India Pledges to Cut Deficit, Cap Debt to Avert Downgrade

Photographer: Brent Lewin/Bloomberg

A man bathes in the Dharavi slum area of Mumbai, India, on Friday, Nov. 9, 2012. Indian industrial production unexpectedly fell in September and the trade deficit widened to a record last month as exports declined, adding to signs that Asia’s third-largest economy is struggling. Close

A man bathes in the Dharavi slum area of Mumbai, India, on Friday, Nov. 9, 2012. Indian... Read More

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Photographer: Brent Lewin/Bloomberg

A man bathes in the Dharavi slum area of Mumbai, India, on Friday, Nov. 9, 2012. Indian industrial production unexpectedly fell in September and the trade deficit widened to a record last month as exports declined, adding to signs that Asia’s third-largest economy is struggling.

Indian officials pledged to cut the widest budget deficit among the world’s largest emerging markets and curb public debt, as a report this week may show the economy grew at close to the slowest pace in three years.

The government is “optimistic” it will rein in the shortfall for the year through March 31 to 5.3 percent of gross domestic product from the previous year’s 5.8 percent, and has no plan “at the moment” to increase its record borrowing program, Finance Minister Palaniappan Chidambaram said in Pune, India, on Nov. 24. The deficit will be cut 0.6 percent annually for the next five years, Chakravarthy Rangarajan, chief economic adviser to Prime Minister Manmohan Singh, said in Kolkata the same day.

Financial markets are pricing in an increasing likelihood that India’s credit rating will be cut to junk status, Credit Agricole CIB said last week. The threat of losing the nation’s investment-grade sovereign ranking prompted Singh to reduce fuel subsidies in mid-September to tackle the fiscal gap and to allow foreign investment in retailing and aviation.

“I would like to, with all the conviction and command, reiterate that the government is fully committed to contain the fiscal deficit within 5.3 percent,” Economic Affairs Secretary Arvind Mayaram said at a conference in Mumbai on Nov. 24. “We have a clear program of disinvestment and we are confident of meeting our targets.”

An auction of wireless spectrum this month helped raise 94 billion rupees ($1.7 billion), less than 25 percent of the target, straining state finances. The auction isn’t yet complete and the government is confident of meeting its goal of raising 400 billion rupees from the sale, said Chidambaram, the finance chief.

Credit Outlook

Standard & Poor’s and Fitch Ratings lowered India’s sovereign credit outlook this year, citing a widening budget deficit and a slump in economic growth and investment in Asia’s third-biggest economy. Both companies rank India’s debt BBB-, the lowest investment grade.

The country’s $1.8 trillion economy will probably expand 5.5 percent in the three months through September, Chidambaram said, matching the preceding quarter’s expansion. Economists predict GDP will increase 5.3 percent from a year earlier, according to the median estimate in a Bloomberg survey of economists before data due Nov. 30. That would match the pace of the first quarter which was the weakest since the three months through March 2009.

JPMorgan Chase & Co. estimates full-year growth through March 2013 will be 5.6 percent, which would be the least in a decade. Expansion may pick up to 6 percent the following year “if the government can push ahead with reform and help revive the investment climate,” Sajjid Z Chinoy and Jahangir Aziz, JPMorgan analysts in Mumbai and Washington, wrote in a Nov. 19 report.

Current-Account Gap

“Fiscal consolidation is a necessary pre-requisite for sustained growth,” Rangarajan, the prime minister’s economic adviser, said Nov. 24. Policy makers also need to address the nation’s “high” inflation and the current-account deficit if growth is desired, he said.

The shortfall in the current account, the broadest measure of trade, widened to a record $21.8 billion in the quarter through March and was $16.6 billion in the three months through June, official data show.

That’s helped push the rupee down about 4.4 percent this year after a 16 percent plunge in 2011. A weaker currency raises import costs and fuels inflation in a nation which imports more than 80 percent of its oil requirements and is the world’s biggest user of gold.

Gold imports account for 80 percent of the current-account deficit, Reserve Bank of India Deputy Governor Subir Gokarn said in Pune yesterday.

Gold Investment

The monetary authority last week issued guidelines prohibiting commercial banks from lending funds for purchases of gold, other than for jewelers’ working capital needs. The central bank is considering new gold investment plans, Gokarn said.

Central bank Governor Duvvuri Subbarao last month cut the RBI’s growth forecast for the current fiscal year to 5.8 percent from 6.5 percent. He raised the monetary authority’s estimate for increases in wholesale prices to 7.5 percent from 7 percent.

The RBI kept benchmark borrowing costs unchanged at 8 percent at its last four policy reviews to curb the worst inflation among the so-called BRIC nations, comprising Brazil, Russia, India and China.

Increases in the nation’s benchmark price index averaged 7.5 percent in the first 10 months of 2012, compared with 2.7 percent in China, 5.4 percent in Brazil, and 4.8 percent in Russia, according to official data.

Barclays Plc economists estimate a 100 basis-point reduction in India’s repurchase rate in the first half of 2013, according to a Nov. 15 report. Policy makers will probably cut the rate by 25 basis points to 50 basis points in the first quarter with further easing “contingent on inflation pressures moderating later in the year,” according to JPMorgan’s report last week.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Pradipta Mukherjee in Kolkata at pmukherjee7@bloomberg.net; Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

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

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