- Special Pages
NEW DELHI: Finance Minister P Chidambaram will present a belt-tightening budget this week in a bid to win back investor confidence, steering clear of populist measures even though polls loom, analysts say.
Investors have increasingly been giving a wide berth to Asia’s third-largest economy — deterred by corruption scandals, suffocating red tape, high inflation, sharply slowing growth and unravelling public finances.
Chidambaram, who is presenting his last full budget before voters head to the polls early next year, must persuade markets that the government is serious about nursing the economy back to health.
The budget for the financial year to March to be unveiled on Thursday will likely be “a triumph of prudence over populism”, said Credit Suisse economist Robert Prior-Wandesforde.
Chidambaram has already made some austerity moves, cutting spending by nine percent this year, and a 10-percent cut is expected for next year in the budget, said Deepak Lalwani, head of investment consultancy Lalcap in London.
“India’s budget is probably going to be the most austere one in many years — deep cuts across departments are on the cards,” Lalwani said.
Chidambaram assured global investors on an overseas roadshow last month that the left-leaning Congress party-led government would present a “responsible budget”.
He has called the government’s fiscal deficit targets of 5.3 percent of gross domestic product for this financial year and 4.8 percent next year “red lines” that cannot be breached.
India must put its financial house in order to avoid a credit ratings downgrade that would deter investment needed to upgrade its dilapidated infrastructure from roads to ports, analysts say.
“A downgrade would take India to ‘junk” status’ — a severe embarrassment for a country aspiring to become a global economic power” and further damage economic recovery prospects, said Lalwani.
India is targeting raising $1 trillion in investment over the next five years to spend on infrastructure whose shabby state is seen as a key impediment to economic growth.
Foreign direct investment in India has fallen by 42 percent in the eight months from last April to December from the same period a year earlier, according to the latest official data.
But analysts warn that government spending cuts carry risks of further weakening consumer demand and consequently economic growth, which is expected to be 5.0 percent to 5.5 percent this year, the lowest in a decade, analysts say.
“The government has to walk a tightrope” between “lack of fiscal credibility on one hand and growth risks on the other,” said senior HSBC economist Leif Eskesen.
Chidambaram insists he can steer India’s growth back to six to seven percent next year despite the doubts of many economists, but that is still below near double-digit levels achieved before the onset of the global financial crisis.
And while much of the world would envy even six percent growth, India says it needs at least nine to 10 percent expansion to significantly reduce poverty.
“What sounded like a big bang (in terms of growth) at one stage is ending in a whimper,” said T N Ninan, editorial director of financial daily Business Standard in a weekend column. “No wonder Mr Chidambaram’s final budget is essentially in the nature of a salvage operation,” he said.