Caviar Off Indian Officials’ Menu as Junk Rating Looms

For Arvind Mayaram, India’s push to avoid having its credit rating cut to junk means he’ll have to forgo caviar and a two-meter-long flat bed in first class on his flight from New Delhi to Washington D.C. this week.

Mayaram, India’s Economic Affairs Secretary, will fly business class instead to the annual World Bank and International Monetary Fund meetings, saving taxpayers at least $3,000. The change is part of moves to narrow a budget deficit that reached almost 75 percent of the 5.4 trillion-rupee ($88 billion) target in the first five months of the fiscal year, imperiling efforts to limit the widest shortfall in major emerging nations.

Prime Minister Manmohan Singh faces a slump in economic expansion that’s hurting tax revenues as rupee weakness raises the cost of oil imports and fuel subsidies. He’ll likely scale back spending on areas such as research and development while maintaining energy, food and fertilizer aid to court support before elections due by May, Religare Capital Markets Ltd. said.

“A spending slowdown may well further sap growth,” said Tirthankar Patnaik, a strategist at Religare Capital in Mumbai. “But revenues are meaningfully below budget forecasts, so the government has little choice.”

Singh seeks a deficit of 4.8 percent of gross domestic product in the year through March 2014, down from 4.9 percent the prior year. Standard & Poor’s reiterated on Sept. 3 it may lower India to junk on risks including budget and current-account imbalances. S&P last classified India as non-investment grade in 2007.

Austerity Steps

The rupee, which has depreciated about 16 percent against the dollar in the past 12 months, weakened 0.6 percent to 61.775 per dollar as of 11:05 a.m. in Mumbai.

The government in September imposed a 10 percent cut in a range of administrative costs, describing the limits on travel, car purchases and the use of luxury hotels as austerity steps.

Mayaram may be saving at least $3,000 flying Deutsche Lufthansa AG’s business rather than first class, based on prices on the airline’s website. He confirmed he’s flying in the lower tier.

Finance Minister Palaniappan Chidambaram, who has repeatedly said he’ll stick to deficit targets, will reduce planned outlays on items such as roads, ports and welfare programs by about 700 billion rupees this fiscal year, according to Yes Bank Ltd.

Net tax revenues in April through August rose 4.9 percent from the same period a year earlier. The government’s budget estimate is for growth of about 19 percent in the tax take in 2013-2014.

Prospects Doubtful

“There’s a possibility that revenues may pick up over the rest of the year, but whether that’ll be enough to prevent further expenditure curbs is doubtful,” said Rupa Rege Nitsure, an economist at Bank of Baroda in Mumbai.

The spending restraint may yet be insufficient to keep the nation’s finances on track as revenues struggle. The budget deficit will widen to 5.1 percent of GDP this financial year, according to a Bloomberg News survey of 19 analysts conducted from Sept. 27 to Oct. 3.

Singh’s second term in office has been marred by graft scandals, average consumer-price inflation of about 10 percent in the past year and a deteriorating economic outlook.

Government spending has contributed to the price pressures, which the Reserve Bank of India is trying to restrain. The RBI raised the benchmark repurchase rate by a quarter of a percentage point to 7.5 percent on Sept. 20.

Slowing Growth

HSBC Holdings Plc predicts economic expansion will weaken to 4 percent in the year that began April 1 as investment moderates. That would be the slowest pace in more than a decade.

The premier began a policy overhaul in September 2012 to spur growth. The steps have included gradual increases in diesel prices aimed at containing subsidies, most recently by state-owned refiners such as Indian Oil Corp. last month.

That push has been undermined by the rupee’s slide, which has stoked energy costs in a nation that depends on imports for about 80 percent of its crude-oil needs.

Pressure on the budget from food subsidies is also set to intensify. Singh’s coalition won parliamentary assent this year for a bill that expands the world’s biggest food program for the poor, a policy that will cost about $20 billion in a full fiscal year, the administration’s estimates show.

“India’s government is still spending much more than it can afford on welfare policies and not enough on infrastructure,” said Shubhada Rao, chief economist at Yes Bank in Mumbai. “That needs to change to restore the economy’s lost growth potential.”

In other developments today, the World Bank lowered its 2013 growth forecast for East Asia’s developing nations to 7.1 percent from 7.8 percent. Risks to the global recovery include fiscal deadlock in the U.S. and the impact of the withdrawal of monetary stimulus from advanced economies, it said.

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