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India Deficit Goal May Be Difficult to Meet, Mukherjee Says

India's Finance Minister Pranab Mukherjee
Pranab Mukherjee, India's finance minister. Photographer: Simon Dawson/Bloomberg

India may find it hard to meet its budget-deficit target in the current fiscal year, Finance Minister Pranab Mukherjee said after the government last week decided to sell more debt.

“It is difficult to maintain the ceiling,” Mukherjee told the Bloomberg UTV television channel in Mirati, his village in the Indian state of West Bengal, referring to the budget-shortfall goal. “I can’t say how I will be able to maintain it now without looking at the cash flows,” he said in the interview that was broadcast yesterday.

India’s budget gap may exceed the government’s estimate as tax revenue may fall short because of slowing economic growth, said Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc. Ten-year bond yields in India have climbed to the highest level in three years on concern demand for existing securities will decrease as the government boosts debt sales.

“Increased debt supply is likely to exert an upward pressure on yields in the near-term,” Standard Chartered’s Sahay said. She expects the budget shortfall to widen to 5.4 percent of gross domestic product in the year ending March 31, compared with the government’s target of 4.6 percent, which would be a four-year low.

Yields Rise

The yield on the 7.8 percent securities due April 2021 rose one basis point, or 0.01 percentage point, to 8.55 percent at 9:19 a.m. in Mumbai, the highest level for benchmark 10-year notes since September 2008, according to data compiled by Bloomberg. The Bombay Stock Exchange Sensitive Index advanced 0.6 percent, and the rupee strengthened 0.5 percent to 49.14 against the dollar.

India’s federal government on Sept. 29 increased its bond-sale target for the second half of the financial year by about 32 percent, citing outflows from national savings accounts. Savings placed by individuals in state-run deposit plans, which are used to fund public spending, have fallen short of target this year and forced the government to increase market borrowings.

So far, tax collections from companies and individuals, including those from the middle class, have surpassed the government’s projection.

India’s gross direct-tax revenue rose 26 percent from a year earlier to 1.54 trillion rupees ($31 billion) in the five months through August, the finance ministry said Sept. 8. The government had budgeted a 19.4 percent increase for the current fiscal year.

Slowing Growth

“The current buoyancy in gross tax collections reflects still-high nominal GDP growth as well as strong trade performance in the first half of the fiscal year,” Atsi Sheth, New York-based senior analyst at Moody’s Investors Service Inc., said in an Oct. 3 note. Sheth expects economic growth to moderate in the second half of the year because of high domestic interest rates and “global uncertainties.”

The International Monetary Fund last month cut its forecast for India’s economic growth. The South Asian nation’s economy will expand 7.8 percent in 2011, the Washington-based lender said, slower than the 8.2 percent projected in June. For 2012, it lowered its estimate to 7.5 percent from 7.8 percent.

The finance ministry plans to raise 2.2 trillion rupees selling bonds in the six months ending March 31, higher than the budgeted 1.67 trillion rupees, R. Gopalan, secretary, Department of Economic Affairs, said last week. The government raised 2.5 trillion rupees in the first six months of the year.

Small Savings

Individual investors withdrew 61.9 billion rupees between April and August from small-savings deposit plans such as those run by post offices, after adding 238.56 billion rupees in the year-earlier period, official data show. The state-run savings programs offer a return of 8 percent, while State Bank of India, the nation’s biggest lender, offers 9.25 percent interest on one-year deposits, according to its website.

Fitch Ratings said Oct. 3 that any further deterioration in Indian government finances may “weigh” on the nation’s debt ratings, even though the decision to increase the annual borrowing plan was expected.

India’s BBB- rating by Fitch, the lowest investment grade, is currently “well supported” with a stable outlook, said Andrew Colquhoun, Hong Kong-based head of Asia-Pacific sovereign ratings at Fitch.

The Indian government’s announcement to issue more debt is “not surprising” and is “within the scope of expectations,” Takahira Ogawa, Singapore-based director of sovereign and international public finance ratings at Standard & Poor’s, said Oct. 3. The nation’s budget deficit will exceed the government’s target, he said, without elaborating.

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