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India's Deficit-Cutting Plan Faltering As Clock Ticks
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The finance minister has banned government officials from holding conferences at five-star hotels, restricted travel and ordered a freeze on hiring to fill vacant posts.
A single-minded political veteran who commands both fear and respect in officialdom, P. Chidambaram is squeezing government ministries hard to cut spending wherever they can, and quickly, to help rein in a widening fiscal deficit.
He is a man under pressure and with an eye on the clock.
Four weeks ago to the day, he set himself an ambitious target: to hold the government's fiscal deficit for 2012-13 to 5.3 per cent of gross domestic product, even as sceptical private economists forecast a deficit closer to 6 per cent.
But a series of revenue-raising setbacks since 29 October now means it will be almost impossible for the government to meet that target, economists say, and some finance ministry officials privately agree. That increases the risk that credit rating agencies could downgrade India to junk in the coming months.
"This has taken on a very great sense of urgency," said Rajiv Biswas, chief Asia economist at market information and analytics company IHS, as he called on Chidambaram to draw up a credible medium-term road-map for cutting the deficit.
The deficit reduction plan unveiled by Chidambaram last month was panned by economists for being short on specifics and putting a firewall around fuel subsidies and expensive social welfare programmes for the country's millions of poor.
A month earlier a deficit reduction panel appointed by Chidambaram had urged the government to cut such spending. Their language was dramatic: India was on the edge of a "fiscal precipice" and the economy was "flashing red lights", they said.
The government is pursuing a "band-aid approach" to deficit reduction, favouring quick fixes instead of implementing structural reforms to slash the deficit, said economist Rajeev Malik of CLSA in Singapore, who is sticking to a deficit forecast of 6 per cent of GDP.
Financial markets are already expecting the government to overshoot its target and hit around 5.6 per cent of GDP, which helped push benchmark 10-year bond yields to the highest in nearly three months late last week.
But the big unknown is the response of the rating agencies, which have repeatedly warned India to get its finances in order.
The agencies are unlikely to reveal their thinking until after Chidambaram unveils his budget in February, analysts said.
But in October, Standard & Poor's said India still faced a one-in-three chance of a downgrade within the next 24 months. Such an outcome would hurt investor sentiment and push up overseas borrowing costs for Indian companies.
Chidambaram, 67, a lanky politician with a disarming smile that belies a sharp tongue and an intolerance for time-wasting, charmed financial markets with his can-do attitude and burst of economic reforms in September, after years of policy inaction by Prime Minister Manmohan Singh's weak coalition government.
Sensex rallied more than 6 per cent after the reforms were announced in mid-September. But concerns over implementation, the fiscal deficit and falling foreign fund inflows have since pushed it down 3.3 per cent.
"We believe that this is the beginning of the realization that a sustainable turnaround in India's growth prospects would require considerable effort, well beyond the burst of measures seen in September," Deutsche Bank said last week in an analyst note headlined "Reality Check".
Man On A Mission
Chidambaram's deficit reduction plan banks heavily on raising billions of dollars by auctioning off cellphone airwaves and selling shares in state companies.
Neither effort is going particularly well.
The government raised less than a quarter of its Rs 40,000 crore target in a 2G spectrum auction in mid-November. A second auction is planned before March, but a senior government official told Reuters there would likely be at least a 200 billion rupee shortfall.
The government succeeded in raising Rs 810 crore by selling shares of state-run Hindustan Copper Ltd on, although the deal was supported by buying from state institutions.
To put the deal in context: New Delhi aims to raise Rs 30,000 crore by selling shares in state companies this fiscal year, which ends in March. Excluding the latest sale, it has managed just Rs 125 crore so far.
The government is staring at an overall shortfall of nearly Rs 50,000 crore in revenues this year, the government official said, speaking on condition of anonymity because of the sensitivity of the subject. This may require additional borrowing from the market.
Chidambaram's battle to tame the deficit takes place against the backdrop of a continued economic slowdown, and a fractious parliament where the government has lost its majority after its biggest coalition ally withdrew support to oppose its reforms.
Manufacturing is contracting and exports are falling. India's October trade deficit of nearly $21 billion was its worst on record.
And a second round of reforms aimed at liberalising the pension and insurance sectors has fallen victim to gridlock in parliament. It is not clear if the measures, long sought by investors, will be passed in the current winter session.
But Chidambaram, who began his second stint as finance minister in August, gives no appearance of being disheartened and as recently as Saturday was confidently predicting he would be able to contain the deficit to 5.3 per cent of GDP.
Inside his ministry, officials said the target looks daunting but they have had no word of a revision from the minister. Instead, he has intensified pressure on them to find ways of meeting the target, they said.
Chidambaram's credibility is not yet on the line, said analysts. In fact, perhaps the opposite. His credentials as an economic reformer during two previous stints as finance minister are buying him time to pull India back from the fiscal precipice.