RBI Says Weak India Growth Outlook Imperils Budget Goals

RBI Says Weak India Growth Outlook Imperils Budget Deficit Goal
Laborers sort unfinished spoons in a spoon production workshop in Mayapuri Industrial Area in New Delhi, India. Photographer: Sanjit Das/Bloomberg

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. Finance Minister Palaniappan Chidambaram said at a ruling party meeting two days ago that the deficit may touch 6 percent of gross domestic product if subsidies aren’t capped, Bloomberg TV India reported today, citing people it didn’t identify.

Risks from the current-account and budget gaps must be tackled “forthwith” to contain threats to economic stability, the central bank said, adding India needs to revive investment in public works to help counter slower growth. The Reserve Bank left interest rates unchanged in July to fight inflation, and said yesterday damping price gains 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.”

Chidambaram expressed concern over the fiscal gap and seeks quicker action on fuel and fertilizer price revisions, according to the Bloomberg TV India report.

Downgrade Threat

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.

Forecasters from Citigroup Inc. to Crisil Ltd., the local unit of Standard & Poor’s, predict the 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 weakened 0.4 percent to 55.4950 per dollar at the close of trading in Mumbai today. The BSE India Sensitive Index fell 0.4 percent.

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. The government may lower the forecast for economic expansion to 6.5 percent, Chidambaram said, Bloomberg TV India reported.

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.

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