Feb. 26 (Bloomberg) -- India’s government pledged to shrink its budget deficit by more than one percentage point of gross domestic product this year from the highest level since 1994, spurring a rally in the nation’s stocks and bonds.
Finance Minister Pranab Mukherjee, presenting the annual budget to parliament, said he plans to narrow the gap to 5.5 percent of GDP in the year starting April 1 from 6.9 percent the previous year. He also said economic growth may reach 10 percent in “not-too-distant future.” Government figures earlier showed GDP rose 6 percent in the fourth quarter from a year before.
The effort may help bolster investor confidence in India, which has the lowest sovereign-debt rating among the BRIC nations that include Brazil, Russia and China. India and China, the world’s fastest-growing major economies, are both taking steps to rein in stimulus measures as the global economy emerges from recession and inflation pressures escalate.
“India and China have bounced back strongly and the challenge now is to check excessive demand and inflation,” D. H. Pai Panandiker, president of New Delhi-based RPG Foundation, an economic research group, said before the budget announcement. “Slashing the deficit will send the right signal to investors about the government’s seriousness to cut debt.”
India’s Sensitive stocks index jumped 1.5 percent as of 12:16 p.m. in Mumbai, helping pare its losses since the start of the year that were spurred in part by global investor concern about sovereign debt quality. Yields on benchmark 10-year government notes fell to 7.78 percent, from 7.82 percent earlier, according to the central bank’s trading system.
Inflation Battle
The reduction in fiscal stimulus also comes as Prime Minister Manmohan Singh’s government is battling to restrain inflation that threatens to erode the purchasing power of the nation’s consumers and worsen poverty rates.
Prices paid by industrial workers in India rose almost 15 percent in December from a year earlier, the most in 11 years. Industrial production grew 16.8 percent in December, the quickest pace since at least 1994, prompting the central bank to say manufacturers are nearing capacity.
Rising prices prompted lawmakers yesterday to debate the issue in parliament and blamed Singh for failing to keep his promise of taming inflation within 100 days of his reelection. Singh was voted back for a five-year term in May last year.
China, which saw an expansion of 10.7 percent last quarter from a year before, the fastest pace among major economies, is battling to slow property prices that surged 9.5 percent in January, the most in 21 months.
Central Bank
Central bank Governor Duvvuri Subbarao said last month that India needs to cut its budget deficit to help check inflation and that it was a “bigger risk” to the economy than any other factor.
Even so, the annual Economic Survey, prepared by officials advising Mukherjee, said yesterday that expansion in gross capital fixed formation, a proxy for investment growth, is at 5.2 percent, below the economic growth rate. That makes it necessary to watch the growth recovery in private investment in the fiscal third and fourth quarters while scaling back fiscal stimulus, according to the report.
“It is important to maintain the policy framework in order not to throttle the spontaneous growth momentum that the economy is demonstrating currently,” said Amit Mitra, secretary general of the New Delhi-based Federation of Indian Chambers of Commerce and Industry.
Corporate Earnings
Company performance has been mixed. Larsen & Toubro Ltd., India’s biggest engineering company, reported a 50 percent decline in profit last quarter after some orders were deferred. Car sales by Maruti Suzuki India Ltd. and other companies gained in January to a record, Society of Indian Automobile Manufacturers said Feb. 9.
Economists at Goldman Sachs Group Inc. and Morgan Stanley expect Mukherjee to increase excise tax by 2 percentage points in the budget. Goldman Sachs economist Tushar Poddar said service tax may also be raised to 12 percent from 10 percent, helping boost total tax revenues by 17 percent next year after a 2 percent gain in the current year.
“Improved growth outlook suggests the government has greater scope to wind back fiscal stimulus and make real structural improvements to the deficit,” said Brian Jackson, the Hong Kong-based emerging-market strategist at Royal Bank of Canada. Jackson expects the government to accelerate asset sales.
Morgan Stanley Research Managing Director Chetan Ahya said Prime Minister Manmohan Singh’s government may target 250 billion rupees ($5.4 billion) from sale of stakes in state-run companies and another 300 billion rupees from auction of licenses for third-generation mobile-phone services.
Wireless Licenses
As many as 13 wireless operators, including Vodafone Group Plc and Bharti Airtel Ltd. may compete for the licenses. The companies in which equity stakes will be sold include Coal India Ltd., India’s monopoly coal producer, and Steel Authority of India Ltd., the nation’s second-largest steelmaker.
The additional revenue may help Mukherjee allocate more money for the government’s rural jobs program after poor monsoon rains last year hurt farm production and reduced incomes of the country’s 700 million people who live in the countryside.
The drop in agriculture output slowed economic growth to 6 percent in the quarter ended Dec. 31 after a 7.9 percent gain in the previous quarter, the nation’s statistics office said in a separate statement in New Delhi today.
Investment Need
“India needs to use its budget to achieve more investment in agriculture and infrastructure,” Gerard Lyons, the chief economist at Standard Chartered Bank said in an interview in New Delhi on Feb. 11. “Fiscal consolidation is important.”
Subsidies for food and fertilizer now consume 10 percent of the budget. With another 14 percent of the budget devoted to defense, 19 percent to pay interest on the national debt and another 25 percent given to states as their share of the federal government’s revenue, there’s little left to pay for schools, power plants and other investments that can boost growth.
As a result, debt sales may rise 2 percent in the 12 months starting April 1 to a record 4.6 trillion rupees, according to the median forecast in a survey of 13 economists and investors.
With a debt level almost quadruple China’s -- at an estimated 86 percent of GDP this year according to the IMF -- fiscal restraint may also aid a sovereign-debt rating that’s the lowest among the BRIC nations, which include Brazil, Russia and China.
“If the exit path is well articulated and well executed, the local-currency rating could be upgraded,” Moody’s Investors Service sovereign analyst Aninda Mitra said in a Feb. 19 interview. Moody’s ranks India’s rupee-denominated debt at Ba2, two levels below investment grade.
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