July 21 (Bloomberg) -- India’s plan to cut the budget deficit next year by an “unprecedented” 1.3 percent of gross domestic product is possible, a senior policy adviser said, allaying concerns of rising government debt. “Comparison with the past will not be very useful because both this year and last year were exceptional years of crisis,” Saumitra Chaudhuri, a member of the planning agency that sets India’s development agenda, said in an interview on July 17. “The deficit target can be met with a combination of higher tax revenue and modest expenditure reform.” Finance Minister Pranab Mukherjee rattled investors earlier this month by forecasting the deficit at a 16-year high of 6.8 percent of GDP for the current year to support economic growth amid the worst global recession since the Great Depression. Moody’s Investors Service and Standard & Poor’s said government finances have weakened and are watching Mukherjee’s plan to trim the deficit before changing India’s credit rating. “While the higher spending bodes well for growth, the rising deficit increases the vulnerability of the economy,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore. Mukherjee told lawmakers and investors after his budget on July 6 that reviving growth is his immediate priority and vowed to trim the deficit to 5.5 percent in the year starting April 1. India’s $1.2 trillion economy grew 6.7 percent in the year ended March 31, the weakest pace since 2003. Chaudhuri, a former economic adviser to Prime Minister Manmohan Singh, estimated the loss of revenue from excise and customs tax concessions this year at about 1 percent of GDP. Tax Concessions Even if three-quarters of the tax concessions are rolled back next year, the deficit will come down to 6 percent, Chaudhuri said. Further, an economic recovery and improving tax receipts may reduce the deficit by 0.2 percent of GDP, he said. Then, the government needs to rationalize some of its expenses, particularly fertilizer and food subsidies, and the deficit could touch 5.5 percent of GDP without even taking account of government asset sales, Chaudhuri said. S&P places India’s long-term local currency rating at BBB-, their lowest investment-grade level, and said in February it could reduce the rating to junk if the deficit isn’t narrowed. Moody’s has a rating of Ba2, two levels below investment grade. S&P estimates Indian government debt at 85 percent of GDP at the end of March 2009. Asset Sales Moody’s and S&P said India has political space to sell stakes in government companies and mobilize revenue after this year’s general elections, indicating their reluctance to lower the nation’s credit rating. Prime Minister Singh formed a government in May without the help of communist parties who had blocked asset sales in his first term. For the moment, the finance ministry hasn’t included receipts from asset sales in its calculation to trim the budget deficit, Finance Secretary Ashok Chawla said on July 17. That’s because current laws stipulate the government must transfer the receipts from the sale of government stakes to a National Investment Fund, created to rehabilitate state-run companies and step up investments in education and health. “The government will take a view on the use of National Investment Fund,” Chawla said. Chaudhuri said proceeds from asset sales “should be used to reduce indebtedness.” Morgan Stanley economist Chetan Ahya said the government could “easily” collect between $15 billion and $20 billion each year until 2013 by selling stakes in state-owned companies. Borrowing Target Indian bonds dropped for a second day yesterday as the government raised its borrowing target for the first half of the fiscal year that started April 1 by 24 percent to 2.99 trillion rupees ($61.7 billion). “Indebtedness is high, there’s no doubt,” Chaudhuri said. “The central bank must manage government borrowings in a way that doesn’t put excessive strain on the credit market.” Governor Duvvuri Subbarao will unveil the central bank’s monetary policy on July 28 as government borrowings rise to a record, adding to inflationary pressures that are already gathering strength, as evidenced from the revisions to the wholesale price data after a two month lag. Last week, the government revised the key wholesale price inflation index for the week ended May 9 to 1.56 percent from 0.61 percent. “Inflation has certainly picked up a head of steam -- it’s not alarming but certainly can’t be ignored,” Chaudhuri said. “Demand isn’t so strong and at this point to try and switch to a tighter policy may not be prudent.” He said formulating monetary policy for the next three to six months will be difficult, as it will be hard to decide when interest rates should be increased. “You can easily say in a longer term sense, say in the next two years, that there will be a switch to a tighter monetary policy,” Chaudhuri said. “But in the next three to six months, I don’t know.” To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net

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