Indian budget faces tough balancing act

July 05, 2009 05:58:23 PM

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India's new Congress-led government will have to balance conflicting objectives of spurring growth and reining in a soaring fiscal deficit when it presents its first budget on Monday.

Economists and analysts predict the budget will focus on regulatory and structural reform to stimulate growth, rather than announcing large government stimulus expenditure.

"The government's hands are tied given the fiscal constraints. They will look at small-ticket projects, focusing on agriculture, infrastructure and telecoms," said Siddhartha Sanyal, an economist with Edelweiss Securities.

"The government's ability to provide any further dose of large and generalised stimulus for the economy will be limited in this budget."

India's fiscal deficit has risen sharply in recent years on loan waivers for poor farmers, subsidies and stimulus packages to boost the economy.

The Congress party in its pre-election interim budget in February sharply increased defence spending following the Islamist extremist attacks on Mumbai last November.

The rise means the fiscal deficit would have ballooned to 6.2 percent of gross domestic product for the fiscal year to March 2009 -- more than double the government's target of 2.5 percent and the highest in nearly two decades.

"The government must script a strategy for investment-led growth," said S.B. Gupta, advisor with the Federation of Indian Chambers of Commerce and Industry (FICCI).

The government in New Delhi has often said that the global economic crisis means more spending would be required to spur domestic growth.

"Any significant increment in expenditure (infrastructure and social) will have to be backed by an increase in revenues (divestments, duty cut roll-backs), to avoid further slippage in fiscal deficit," said Gaurav Dua, vice president with brokerage Sharekhan.

On Thursday, the finance ministry said India could manage economic growth of more than 7.0 percent this fiscal year, but stressed the importance of reducing the deficit.

India's economy grew by 6.7 percent in the year ended March 31 -- the slowest rate since 2003 and down from nine percent a year earlier, as the effects of the global economic downturn hit home.

"The speed at which the Indian economy returns to a high growth path in the short term depends on a revival of the global economy, particularly the US economy," the ministry said in its annual economic survey.

Economists expect reforms to be announced to boost infrastructure growth and revenues from divestment.

PricewaterhouseCoopers estimates that more than 500 billion dollars' worth of investment will flow towards India's infrastructure sector by 2012, to upgrade or build more roads, ports, railway lines and airports.

"Stimulus to infrastructure can be provided through the public-private partnership (PPP) model. This is the low-hanging fruit (for the government)," said Pradip Kanakia, a member of the leadership team at KPMG.

"The PPP model should be extended to power, healthcare and education, to boost economic and social growth," Kanakia, who is based in the southern city of Bangalore, told AFP.

"Disinvestment is expected to start in a small manner. The secondary benefit will be to boost market liquidity and give a push to the IPO market," said Rajeev Malik, an economist with Macquarie Research, based in Singapore.

Tax reliefs appear unlikely due to a revenue slowdown, experts said.