India Retains Borrowing Aim as It Fights Widest BRIC Deficit

The Indian government left the target for debt sales in the second half of the fiscal year unchanged after stepping up efforts to pare its budget deficit.

The Finance Ministry plans to raise 2 trillion rupees ($37.7 billion) in the six months ending March, Economic Affairs Secretary Arvind Mayaram told reporters in New Delhi yesterday, retaining the goal given earlier this year. Bond sales in April through September will reach 3.7 trillion rupees following an auction due today, according to central bank data.

India’s budget deficit is the widest among major emerging nations as slower growth hurts tax receipts and subsidies fan spending, imperiling the government’s goal of narrowing the gap to 5.1 percent of gross domestic product from 5.8 percent last year. Officials boosted diesel prices on Sept. 14 to restrain expenditure on compensation for below-cost sales.

“When growth is slowing, it will be very challenging to meet the deficit target and the government will have to resort to extra bond sales later,” said Ashutosh Datar, an economist at IIFL Ltd., a Mumbai-based brokerage. Bond yields may come under pressure if debt supply rises, he said.

The yield on the 8.15 percent bond due June 2022 declined to 8.15 percent from 8.16 percent yesterday. The BSE India Sensitive Index rose 1 percent, while the rupee strengthened 0.3 percent to 52.86 per dollar.

Panel Comments

India’s deficit may widen to 6.1 percent of GDP this fiscal year if no action is taken to tackle it, a panel set up by Finance Minister Palaniappan Chidambaram said in a report dated Sept. 3 and released today.

The panel, headed by Vijay Kelkar, recommended subsidy cuts and faster sales of shares in state-owned companies, steps it said would help limit the budget shortfall at 5.2 percent.

Sovereign-debt issuance will exceed the 5.69 trillion rupees target for the year ending March 31 by 500 billion rupees, according to the median of eight estimates compiled by Bloomberg before yesterday’s release.

The fiscal gap in the five months through August was 65.7 percent of the annual goal of 5.14 trillion rupees, the Controller General of Accounts said in a statement today.

Prime Minister Manmohan Singh followed the 14 percent rise in diesel tariffs, the first in over a year, with steps to open the economy to more foreign investment, encourage capital inflows and bolster the stock market.

Policy Overhaul

The burst of policy changes snapped months of inaction that dimmed India’s outlook, weighed on the rupee and increased the odds of a credit-rating downgrade.

The rupee has strengthened 2.7 percent against the dollar since Singh began the overhaul on Sept. 14, paring its drop in the past year to about 7.8 percent.

The prime minister is trying to trim a subsidy bill for food, fuel and fertilizer by 12 percent to 1.9 trillion rupees in the year through March 2013. The government also aims to raise 300 billion rupees from share sales by state companies.

It set a budget-deficit target of 5.1 percent of GDP for the year in the budget released in March. Citigroup Inc. estimates the shortfall will be 5.9 percent and Crisil, Standard & Poor’s local unit, forecasts 6.2 percent.

The Reserve Bank of India has signaled that narrowing the budget gap is pivotal to increasing room for interest-rate cuts to bolster economic expansion, which weakened to a nine-year low of 6.5 percent in 2011-2012.

The Finance Ministry expects a budget deficit of about 5.3 percent of GDP this financial year, two officials with knowledge of the matter said Sept. 21, asking not to be identified as the projection isn’t public.

Standard & Poor’s and Fitch Ratings reduced the outlook on India’s credit rating to negative from stable earlier this year, bringing the nation a step closer to junk status on weakness such as fiscal and trade imbalances.

India’s current-account deficit narrowed last quarter from a record, boosting the outlook for the rupee, another report showed today. The shortfall in the broadest measure of trade was $16.4 billion in the three months ended June 30, compared with a $21.7 billion gap from January through March.

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