India will probably contain the budget deficit at about 5.3 percent of gross domestic product this fiscal year as it tries to slow inflation, and economic growth is set to recover, Finance Ministry advisers said.
“The government is committed to fiscal consolidation,” they said in a report in New Delhi today, predicting GDP will rise as much as 6.7 percent in the year through March 2014. Deficit curbs, along with “demand compression and augmented agricultural production should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates,” they said.
Finance Minister Palaniappan Chidambaram, who presents the budget tomorrow, faces the task of narrowing the widest fiscal gap in major emerging nations to avert a credit-rating downgrade. The Reserve Bank of India has signaled government spending has added to inflation risks, limiting the extent of interest-rate cuts as the economy falters.
“The government has little option but to aggressively push for fiscal cuts to give the right signals to rating agencies,” Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai, said before the report. “Slower economic growth and higher subsidies, however, will make it challenging to deliver on the promises in an election year.”
The rupee, which has weakened about 8.4 percent versus the dollar in the past year, gained 0.6 percent to 53.795 as of 12:42 p.m. in Mumbai. The BSE India Sensitive Index (SENSEX) of stocks rose 0.8 percent. The yield on the 8.15 percent note maturing June 2022 declined to 7.81 percent from 7.82 percent yesterday.
“Latest available data indicate nascent signs of a turnaround in the macroeconomic environment,” the advisers said.
Gross domestic product may rise 6.1 percent to 6.7 percent in the year through March 2014, from an estimated 5 percent in 2012-2013, the survey said. The expansion in the current fiscal year would be the slowest since 2002-2003.
The survey of the economy is prepared by a panel headed by Raghuram Rajan, chief economic adviser in the finance ministry.
Chidambaram may curb spending growth in the budget tomorrow to help damp inflation of almost 7 percent and boost the central bank’s scope to reduce borrowing costs. He has pledged to pare the fiscal gap to 4.8 percent of GDP in 2013-2014, from 5.3 percent this fiscal year.
The Reserve Bank lowered the benchmark repurchase rate to 7.75 percent from 8 percent last month, the first reduction since April 2012. Governor Duvvuri Subbarao said Feb. 16 that “there is room for monetary easing, but that room is limited.”
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