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WRAPUP 2-India ups spending to spur growth, deficit hits markets

Published 07/06/2009, 06:34 AM
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* Fiscal deficit to balloon to 6.8 pct of GDP this year

* Deficit, borrowing needs larger than markets had expected

* Bond yields rise, stocks fall nearly 6 pct, rupee weakens

* Spending to rise 36 pct

* No pressure on credit rating despite yawning deficit- S&P

By Surojit Gupta and Tony Munroe

NEW DELHI, July 6 (Reuters) - India said on Monday its fiscal deficit would blow out to the biggest level in 16 years as it boosts spending to support the slowing economy, disappointing investors who dumped stocks and bonds.

Investors had hoped the new government would use a strong re-election mandate to push through pro-market reforms, but the populist budget it unveiled lacked significant policy changes and focused heavily on increased borrowing and spending to aid farmers and the poor.

Stocks tumbled nearly 6 percent, bond yields spiked and the rupee weakened after Finance Minister Pranab Mukherjee, sticking to the ruling Congress party's theme of "inclusive growth", said the fiscal deficit for the year ending March 2010 would increase to 6.8 percent of gross domestic product (GDP).

Investors had expected the fiscal deficit to grow to up to 6.5 percent, from 6.2 percent in the previous year.

The first budget of Prime Minister Manmohan Singh's new administration was seen as a roadmap for how he will govern for the next five years after his Congress party-led coalition was re-elected by an unexpectedly decisive margin in May.

"While the thrust on agriculture, infrastructure, etc., augurs well from a long-term growth perspective, the fiscal profligacy is quite obvious in the near term," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

Budget documents showed the government's gross market borrowing in the current fiscal year would total a record 4.51 trillion rupees ($93.4 billion), 14 percent higher than a Reuters poll forecast and 23 percent higher than the borrowing target cited in an interim budget in February.

Mukherjee said overall spending would increase by 36 percent this year, but also called for a return to fiscal responsibility targets "at the earliest."

His budget document said the fiscal deficit target would be closer to 3 percent of GDP in the year that ends in March 2012, assuming a global economic recovery.

DEFICIT SPENDING

"Yes, I have left a huge fiscal deficit, no doubt, but with the objective of having adequate money to inject in the system to help the productive sectors and to lead the demand-led growth," Mukherjee said on television after his speech.

He said he hoped 9 percent economic growth can be achieved next year.

Mukherjee also said states had agreed on the general structure of a goods and services tax (GST), which may be implemented as early as next year and is expected to simplify the country's tax structure and boost revenues.

Market watchers expressed concern that Mukherjee did not unveil significant reforms nor provide details on plans by the government to sell stakes in state-controlled companies, which would reduce budget pressures.

"He did not come out with key policy changes -- PSU (public sector undertaking) disinvestment, securities transaction tax, raising FDI (foreign direct investment) limit for banking and insurance and FII (foreign institutional investor) limit for key sectors," said Madhavi Vora, managing director, ULJK Securities.

"It is really a big disappointment," she said.

Mukherjee said states should remove bottlenecks for infrastructure projects, and outlined plans for more flexible financing for infrastructure and development of long-distance gas pipelines.

Inadequate power supplies and transport links have long choked India's growth.

FOCUS ON FARMERS, POOR

Unconstrained by its previous alliance with leftist parties, Singh's new government had a freer hand to implement economic liberalisation measures to drive growth, but instead focused its budget on rural development and support of social programmes.

"It is essentially a rural development-oriented budget," Singh said on television. "It is a measure of our commitment to the well-being of the poorer sections of our community."

India is hobbled by a fiscal deficit that ballooned to 6.2 percent in the financial year that ended in March. Including off-balance sheet items like subsidies for fuel and food, as well as state-level shortfalls, India's overall fiscal deficit for the year that ended in March was about 10 percent of GDP.

That compares with below 3 percent of GDP for China and more than 12 percent for the United States in the latest fiscal years.

Despite the expanded deficit projection, Standard & Poor's analyst Takahari Ogawa said India's sovereign credit rating faces no significant pressure. S&P put India's BBB-minus rating on a negative outlook in February, citing an unsustainable deterioration in the country's fiscal position.

India's economy, Asia's third-largest, grew at 6.7 percent in the most recent fiscal year, held back by the global downturn, after expanding at least 9 percent for three straight years.

The finance ministry said on Thursday that growth could rise to 7 percent this year -- towards the high end of the range of private forecasts -- and subsequently increase to 8.5 to 9 percent if the government adopted sweeping reforms and accelerated infrastructure development.

With the developed world mired in recession, big emerging economies led by China, which is on track for 8 percent growth this year, and India account for a rising share of global output and are expected to help drive worldwide recovery. Both economies have been fuelled by stimulus spending to spur domestic demand.

The run-up to India's annual budget announcement, always subject to fierce jockeying by ministries, industries and other interest groups, was especially frenzied this year given the ruling coalition's decisive electoral win.

Hopes that the government would unleash sweeping market-oriented reforms sent Indian stocks surging 17 percent on the first trading day after the election result in May. Indian stocks jumped by nearly half in the April-June quarter. (US$1 = 47.79 rupees) (Additional reporting by Saikat Chatterjee and Rajkumar Ray) (Editing by Bryson Hull and Kim Coghill)

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