India Minister Honeymoon Over on ‘Questionable’ Budget, BNP Says

March 1 (Bloomberg) -- India will probably miss a deficit target set yesterday by finance minister Palaniappan Chidambaram as his budget plan to narrow the nation’s fiscal gap is based on “highly questionable” tax and spending assumptions, BNP Paribas SA said.

The deficit will overshoot the target of 4.8 percent of gross domestic product presented to parliament yesterday by at least 0.5 percent of GDP unless the nation’s economy grows faster than forecast, Richard Iley, an analyst at BNP, wrote in a report dated yesterday.

“The honeymoon is over,” Iley wrote. “Chidambaram has been a breath of fresh air since his appointment last August, but now he hopes to reverse cuts in 2014 and has pencilled in a capex boom financed by populist tax hikes on the rich, a sharp pick-up in disinvestment proceeds and implausible control of subsidy spending.”

Total expenditure will climb to 16.7 trillion rupees ($307 billion) in 2013-2014 from an estimated 14.3 trillion rupees this financial year, budget documents showed. Gross market borrowing was set at a record 6.29 trillion rupees for 2013-2014, an increase of almost 13 percent. Net borrowing will be 4.84 trillion rupees.

Government spending has contributed to inflation of almost 7 percent, which has limited the extent of interest-rate cuts by the central bank in an economy that expanded last quarter at the weakest pace since 2009.

Chidambaram allocated 330 billion rupees for the ruling coalition’s flagship rural jobs program and 100 billion rupees for a plan to give the poor cheap food grains, ahead of a general election due by 2014.

Government Spending

A report yesterday showed GDP rose 4.5 percent in the three months to Dec. 31 from a year earlier, lower than forecast and the weakest pace in almost four years, as cooling investment, a drop in exports and government spending cuts sapped growth.

The government will announce another set of decisions during a reply to the budget speech in parliament, Chidambaram said in a briefing yesterday. The immediate goal is to move GDP growth above 6 percent, he said. India is targeting a growth rate of of 7 percent in FY15, he added.

Chidambaram imposed a one-year 10 percent tax surcharge on annual personal incomes above 10 million rupees and increased customs duties on yachts, high-end motorcycles and luxury cars. He raised the surcharge on some companies to 10 percent.

‘Too High’

Projected spending on a subsidy program ranging from diesel to food and fertilizers will decline about 11 percent to 2.2 trillion rupees in 2013-2014. Oil subsidies will decline 33 percent to 650 billion rupees.

Revenue assumptions are “too high,” Credit Suisse AG analysts Neelkanth Mishra and Ravi Shankar wrote in a note dated yesterday. Increased spending will be “supportive of growth” and could “hurt the current-account deficit and the currency,” they wrote.

“The deficit could be much higher than budgeted,” according to the Credit Suisse report.

Indian rupee one-month non-deliverable forwards dropped to near a six-week low of 54.90 per dollar today. The currency many weaken to 55 per dollar in three months, Goldman Sachs Group Inc. forecast.

The S&P BSE Sensex sank 1.5 percent to 18,861.54 yesterday, ending February with a drop of 5.2 percent, its first monthly loss since October. The Bank of New York Mellon India ADR Index tumbled 1.8 percent to 1,111.51 in New York, capping a 2.8 percent monthly decline, its biggest since October. SGX CNX Nifty index futures for March delivery fell 0.8 percent to 5,708.5 at 11:33 a.m. in Singapore.

Earnings Impact

Chidambaram in 2012 revised the budget-deficit goal for this financial year to 5.3 percent from 5.1 percent of GDP. He set a target of narrowing it to 3 percent by 2017. The shortfall, which was 5.8 percent in 2011-2012, is the widest in the BRIC group that also includes Brazil, Russia and China.

Jim O’Neill, chairman of the asset-management division that coined the BRIC acronym for the biggest emerging markets a decade ago, said Indian markets are not impressed with the budget. India isn’t “coming to grips with its issue,” O’Neill said in an interview with ET Now channel yesterday.

The budget lacked “sizzle,” Citigroup Inc. analysts Aditya Narain and Jitender Tokas wrote in a report dated yesterday.

The tax increase may cut market earnings by 1 percent to 1.5 percent in the financial year starting April 1, according to the report. The budget is “marginally positive” for utilities, capital goods, real estate, energy stocks and negative for auto companies, according to the Citigroup analysts. Credit Suisse recommended shares of companies including ITC Ltd., Emami Ltd., Tata Consultancy Services Ltd. and Wipro Ltd.

To contact the reporters on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net; Matthew Oakley at moakley@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net