NEW DELHI: India will struggle to meet its already swollen deficit target this year after a dismal response to this week’s auction of mobile phone licences and a battle to sell stakes in state companies, Indian finance ministry officials privately concede.
Global rating agencies have threatened to downgrade India’s sovereign credit rating to junk if it fails to put its fiscal house in order. Analysts said while the disappointing auction would likely not be a deciding factor, it underscored the challenges facing the government in trying to slash the deficit.
Just last month, subdued tax revenue and higher spending on subsidies forced the government to revise its fiscal deficit target to 5.3 percent of gross domestic product (GDP) for the current financial year from a previous target of 5.1 percent.
In setting the new target, the government was banking heavily on generating billions of dollars from the auction of second-generation (2G) mobile phone licences. But the auction this week yielded just under 25 percent of the targeted Rs400bn ($7.3bn), a result that caught officials off-guard.
Finance Minister P. Chidambaram declined to answer questions about the disappointing auction, but his officials said it may have pushed the government’s already tough deficit target even further out of reach.
“The task has become more difficult. Some out-of-the-box measures are needed to save the situation,” a senior finance ministry official said. Other finance ministry officials gave similar assessments.
Seven private economists polled by Reuters said they now expected the fiscal deficit for the year to end-March 2013 to slip to 5.5-6 percent of GDP. “Slippage is now inevitable. How much slippage happens depends on whether they can actually cut down on any spending area,” said Sonal Verma, an economist at Nomura.
The government still holds some tools to get it closer to its fiscal goal. It has an option to sell its stakes in private firms such as Axis Bank, infrastructure company Larsen and Toubro and hotel and tobacco conglomerate ITC. It can also ask for special dividends from cash-rich state-run companies.
Besides selling still-unsold telecom spectrum, it could even consider liquidating its land holdings, finance ministry officials said.
But the officials said it was unclear just how much revenue this would all generate and whether it would be enough to meet the 5.3 percent fiscal target.
Last year, the fiscal deficit overshot the target of 4.6 percent by 1.2 percentage points. Another big slippage this year could further erode the nation’s fiscal credibility. “It is not business as usual. Everybody is under pressure to meet the (deficit) target,” said a finance ministry official. “Time is running out.”
The government’s battle to mend its finances not only undermines the battle against high inflation, but it also lowers growth prospects as funding the deficit from domestic savings crowds out private investment.
Reuters
