July 10 (Bloomberg) -- Prime Minister Narendra Modi’s two-month-old government unexpectedly kept India’s budget deficit target unchanged, adding pressure on him to boost revenues to pay for food and fuel subsidies.
The gap will narrow to 4.1 percent of gross domestic product in the year through March 2015, as projected by the previous administration, Finance Minister Arun Jaitley said while presenting Modi’s first budget in New Delhi. The target is a seven-year low from the previous year’s 4.5 percent.
“The revenue collection number is quite a strong one,” said Siddhartha Sanyal, chief India economist at Barclays Bank Plc in Mumbai, who expected the target to be revised to 4.5 percent. “If that comes through, it’s well and good. If the number is on the downside, then it makes the situation a bit complicated.”
Modi faces pressure to bolster economic growth from near a decade low while narrowing one of Asia’s widest fiscal deficits after winning the biggest Indian mandate in 30 years. The central bank has sought to curb a subsidy bill that has grown fivefold over the past decade while keeping interest rates high as a weak monsoon risks stoking Asia’s fastest inflation.
The measures announced by Jaitley reduce revenues by as much as 0.2 percent of gross domestic product, Fitch Ratings, a credit-rating company, said in a statement today.
“Fitch is surprised that the Indian Finance Minister Arun Jaitley has stuck with the outgoing government’s fiscal consolidation path,” Andrew Colquhoun, head of Asia-Pacific Sovereigns Group at Fitch, said in a statement. “The agency is currently unsure how this can be met without further revenue-strengthening or expenditure-saving measures.”
India’s benchmark stock index fell 0.3 percent today, while the rupee weakened 0.3 percent at 4:03 p.m. in Mumbai. Stocks have gained 5.2 percent since Modi’s win on May 16, among Asia’s top performers in that time, on bets that the first parliamentary majority for a single party since 1984 will enable him to make tough choices.
“I take the budget announcements as positive,” Adrian Lim, a Singapore-based money manager at Aberdeen Asset Management Plc, which oversees $322 billion worldwide, said in an interview on Bloomberg TV India today. “We are not looking for immediate solutions but looking for commitments toward the development of healthier, stronger fiscal situation for the next three-four years.”
Jaitley called for revenues as a percentage of the economy to increase as he mapped out a plan to reduce the fiscal deficit to 3 percent of the economy by 2017. He cited rising oil prices and a weak monsoon as key risks for the target.
“I am accepting the challenge and I am going to endeavor,” Jaitley said in an interview with state-run Lok Sabha TV after the budget speech. “The only way I am going to achieve the target is by collecting more taxes, not by raising the rates but by expanding the base.”
Jaitley projected revenues will rise to 11.9 trillion rupees, 1.9 percent more than the previous government forecast in February, boosted by higher asset sales. Expenditure will increase 1.8 percent to 17.9 trillion rupees, with subsidies maintained at about 2.6 trillion rupees.
“We can either trust that the government will deliver price hikes as the year progresses,” Mirza Baig, head of foreign exchange and interest rate strategy at BNP Paribas SA in Singapore, wrote in a report today. “Or we can be more cynical and suggest that the Modi administration intends to continue the practice of rolling forward subsidy expenditure to next year.”
Jaitley had criticized former Finance Minister Palaniappan Chidambaram after the interim budget in February, saying he narrowed the deficit by cutting planned spending on roads, bridges and power plants, while underestimating and deferring subsidy payments.
Chidambaram also assumed GDP growth for the fiscal year at 6.5 percent, higher than the central bank’s best-case scenario of a 6 percent expansion. The finance ministry said yesterday it expects the economy to expand as much as 5.9 percent.
India’s fiscal deficit in the two months ended May was 2.4 trillion rupees ($40 billion), or 46 percent of the full-year target. Jaitley proposed to “overhaul” food and fuel subsidies to make them more targeted while still providing protection for the marginalized and poor.
“They will take some time to meet their overriding expectations,” said Rupa Rege-Nitsure, chief economist at the Bank of Baroda. “If foreign investors do the budget arithmetic, they will see that the government is trying to be more liberal and externally oriented. It is definitely a positive.”
India has adequate food stocks to cope with a drop in output from a weak monsoon, Jaitley said today. He proposed setting up a price stabilization fund of five billion rupees ($83 million) for farm produce while undertaking a “Second Green Revolution” to boost agriculture output.
Jaitley announced plans to revive special economic zones while building more highways, coal-fired power plants, airports and ports. India will also spend 2 billion rupees ($33 million) to build the world’s largest statue of independence hero Sardar Vallabhai Patel, while allocating about 3 billion rupees on programs to ensure women’s rights and safety, Jaitley said.
India will raise the caps on the automatic approval for foreign direct investment in the defense sector to 49 percent, from 26 percent now, Jaitley said, with anything more than that requiring special approval. The FDI limit in the insurance sector would also be raised to 49 percent, he said.
Jaitley said he hoped to reach a final solution on a goods and services tax by the end of the year. He also announced a review of cases where levies were applied retrospectively, disappointing analysts who wanted the cases to be scrapped, a move that may affect a $2.4 billion claim on Vodafone Group Plc over a 2007 acquisition.
“It is a lost opportunity in terms of a bold move that would have fired up the investment climate tremendously,” said Sudhir Kapadia, a partner at Ernst & Yong LLP.
Spending on fuel, food, fertilizer and other subsidies rose to 16 percent of India’s total budget in the year ended March 2014 from 9 percent in 2004, while plan spending climbed to 30 percent from 26 percent, according to budget documents. Two-thirds of India’s 1.2 billion people live on less than $2 per day, according to the World Bank.
“There weren’t measures that told us how this deficit target was going to be achieved,” said Atsi Sheth, senior vice president, sovereign risk group, Moody’s Investor Services. “I certainly don’t think that we know any more about what they’re going to do over the next five years than we did yesterday.”
To contact the editors responsible for this story: Daniel Ten Kate at email@example.com Jeanette Rodrigues