Chidambaram working against the deficit clock

Finance Minister P Chidambaram 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, 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 2012-2013 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 October 29 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 of credit rating agencies downgrading India to junk in coming months.

"This has taken on a great sense of urgency," said Rajiv Biswas, chief Asia economist at market information and analytics company IHS.

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 poor.

A month earlier a deficit reduction panel appointed by Chidambaram had urged the government to cut such spending. But 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 rating agencies, which have repeatedly warned India to get its finances in order.

The Sensex rallied more than 6 per cent after the economic reforms were announced in mid-September. But concerns over fiscal deficit and foreign fund inflows have pushed it down 3.3 per cent.

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 Rs 20,000 crore shortfall.

The government is staring at an overall shortfall of nearly Rs 50,000 crore in revenues this year, a government official said. This may require additional market borrowings.

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.

But Chidambaram, as recently as Saturday, was confidently predicting he would be able to contain the deficit to 5.3 per cent of GDP.

His 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.