Jan. 23 (Bloomberg) -- India’s finance minister said fiscal prudence will be a key budget theme next month and pledged to deepen an economic-policy overhaul by implementing a goods and services levy to spur commerce and widen the tax base.
“It’s absolutely important to signal to the world that we are on the path of fiscal consolidation,” Palaniappan Chidambaram told investors in Hong Kong yesterday, as he began a tour of Asia and Europe to woo investors. Approval for the goods and services tax by December is “ambitious but doable,” he said.
Chidambaram, 67, said in an interview he plans to stick to a budget-deficit target of 4.8 percent of gross domestic product in the year through March 2014, adding he’d like interest rates to moderate to revive growth. Government spending and a drop in the rupee have contributed to an inflation rate exceeding 7 percent, limiting scope to reduce borrowing costs even as the economy expands at the weakest pace in a decade.
“There are a lot of risks that may make it tough to stick to the budget-deficit target, such as the strength of the economic recovery in India,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “The central bank has room to cut rates, but not aggressively given suppressed price pressures.”
An inflation rate over 7 percent is “unacceptable,” Chidambaram told investors in Singapore today during the second leg of his tour. He also said that some subsidies, such as for kerosene, are merited. India’s subsidy program ranges from diesel to fertilizer, stoking the fiscal shortfall.
Tackling inflation, the budget deficit and the current-account gap will help the rupee “find its fair value,” he said in an interview with Bloomberg Television in Singapore.
Chidambaram yesterday vowed the fiscal gap won’t breach his target of 5.3 percent of GDP in 2012-2013 “under any circumstance.” He pledged to reduce it by 0.6 percentage point annually to 3 percent. He said that he plans to meet his targets with better tax collection and an expanded tax base.
India’s proposed goods and services levy may subsume about 15 state and federal levies. Preventing a product being taxed more than once would aid industry, while casting a wider net over services would help buoy revenue, according to India’s Finance Commission.
Standard & Poor’s and Fitch Ratings warned last year that they may strip India of its investment-grade credit rating on risks including fiscal and trade shortfalls.
“In the last five and half months, we have addressed the problem in small but significant steps,” Chidambaram told investors yesterday. “Add all these together, and we will see we have traveled quite a distance. There’s no case at all to downgrade India.”
The government last week partially freed diesel prices from state control to curb fuel subsidies, adding to a policy overhaul since mid-September. Other steps taken include opening industries such as retail and aviation to more foreign investment, lowering taxes on overseas borrowing and moving to speed up infrastructure projects.
Chidambaram said in Singapore today that he’s confident bills to liberalize foreign investment in the pension and insurance industries will be passed in the next session of parliament, which usually begins in the last week of February.
Prime Minister Manmohan Singh’s government is seeking to allow overseas companies to invest in the pensions industry for the first time, and hold as much as 49 percent of insurance businesses.
The rupee has rebounded about 6 percent from a record low touched on June 22, spurred by the policy changes, and closed at 53.6737 a dollar in Mumbai. It is down 6.7 percent in the past year. The BSE India Sensitive Index is up about 10 percent since mid-September.
Chidambaram outlined his goals for fiscal consolidation in October, three months after becoming finance minister for the third time. His ministry predicts GDP will rise as little as 5.7 percent in 2012-2013, the slowest pace since 2002-2003.
“Chidambaram has brought India back on the investment radar screen,” said Samir Arora, founder of Singapore-based hedge fund Helios Capital Management Pte., who heard the minister’s speech today. “In July to August last year, India was a non-marketable story.”
India will seek to raise at least 300 billion rupees ($5.6 billion) from the sale of shares in state-owned companies in 2013-2014, Chidambaram said in Hong Kong yesterday.
Inflation eased to a three-year low of 7.18 percent in December, while remaining the fastest among the largest emerging markets. India’s current-account deficit swelled to a record $22.31 billion in the quarter ended Sept. 30.
Fifteen of 18 analysts surveyed by Bloomberg News predict the Reserve Bank of India will lower interest rates to 7.75 percent at its Jan. 29 review, from 8 percent. Two expect a cut to 7.5 percent and one no change.
The finance minister said the final call on borrowing costs rests with the Reserve Bank. He predicted Asia’s No. 3 economy will expand 6 percent to 7 percent in 2013-2014, and 8 percent in the following fiscal year.
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