India sees bigger budget deficit, worrying markets
MUMBAI, India — Aiming to revive economic growth, India’s government said Monday increased spending in its new budget would inflate the fiscal deficit to 6.8 percent of the country’s gross domestic product.
Stocks plunged on concerns about a ballooning budget deficit and disappointment that Finance Minister Pranab Mukherjee stopped short of announcing any new liberalization measures. Speculation that the ruling Congress Party would quickly enact sweeping pro-market reforms have been running high since May’s national elections.
Hoping to create jobs and spur growth, the government will boost total spending 36 percent to 10.3 trillion rupees ($214 billion) for the year that ends March 2010, Mukherjee said in presenting the budget to Parliament.
“The first challenge is to lead the economy back to a high growth rate of 9 percent per annum at the earliest,” he said. Economic growth for the year through March slowed to 6.7 percent.
Mukherjee said he aimed to increase infrastructure spending to 9 percent of gross domestic product by 2014, boost defense spending, provide credit to troubled exporters and simplify the tax code.
Spending on a rural employment program that last year provided jobs to 44.7 million poor households would go up 144 percent to about $8 billion, he said. Government food subsidies for the poor and farmer loan relief programs would also be extended.
“Aam aadmi” — the “common man” in Hindi — “is now the focus of all our programs and schemes,” he said.
Investors, however, worried about India’s bulging fiscal deficit and the lack of new concrete reforms.
The benchmark Sensex index tumbled 869.65 points, or 5.8 percent, to close at 14,043.40, with banking, real estate, and capital goods stocks leading declines.
The country’s deficit has grown since the government enacted three fiscal stimulus packages of tax cuts and spending, on top of deep spending on fuel subsidies, government pay hikes, and farmer loan and employment programs. Last fiscal year, the deficit amounted to 6.2 percent of GDP; the year before that, it was 2.7 percent of GDP.
That has caused credit ratings agencies to threaten downgrades and made economists concerned that government borrowing will crowd out the private sector.
Taking into account state deficits and off-balance sheet items, the total deficit is far higher. Goldman Sachs puts the consolidated fiscal deficit at 10.1 percent of gross domestic product for this fiscal year.
Prime Minister Manmohan Singh praised Mukherjee for carrying forward “inclusive growth,” a mantra of the ruling Congress Party, which has pushed vast social welfare and wealth redistribution programs even as it slowly opens Asia’s third-largest economy to market forces and foreign investors.
The budget “seeks to carry forward the process of inclusive growth,” Singh said in a nationally televised interview with an editor of the Economic Times newspaper. “It is essentially a rural development-oriented budget.”
Singh acknowledged that the burgeoning fiscal deficit is “a problem.”
“In the medium term we have to return to path of fiscal rectitude,” he said but refused to give a deadline.
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