Re offers relief as subsidy pressure eases

 A recovery in the rupee is giving Finance Minister P Chidambaram rare relief in his battle against a threatened credit rating downgrade to junk status by reducing pressure on the government's subsidy bill.

Still, the minister can only meet his fiscal deficit target of 4.8 per cent of GDP by rolling over a substantial amount of subsidy spending into next year's budget and by finding big savings elsewhere, two senior finance ministry officials said.

But a 10 per cent rise in the rupee - which slumped to a record low late in August - means Chidambaram can at least reduce the amount of subsidy spending that gets pushed into next year's budget to $12 billion from a previous estimate of $15 billion, these officials said.

Other budget headaches mean he will have to find about $8 billion in savings from budgeted spending plans to meet the deficit target, they said.

The sources, who have direct knowledge of the budget issues or have been briefed on them, declined to be identified because the revised budget numbers are not yet public.
"Chidambaram wants to put the house in order before the 2014 election campaign kicks off and the US Federal Reserve begins cutting its monetary stimulus," said one of the officials.

National elections have to be called by May 2014 and emerging markets are on edge as investors speculate on when the US central bank might reduce its economic stimulus, which could prompt capital to shift into US assets.

A finance ministry spokesman declined to comment on the budget estimates other than saying revised figures are still being worked out.

Missing targets

Chidambaram has said the fiscal deficit target is a line that will not be crossed as he seeks to fend off the threat from Standard & Poor's to downgrade India's sovereign credit rating, currently clinging to the bottom rung of investment grade.

The budget is under pressure on a number of fronts; subsidy spending on fuel, food and fertiliser has blown out, economic growth has slumped to its weakest level in a decade and a programme to sell state assets is in tatters.

The government had initially budgeted spending of about $36 billion for subsidies, but that swelled to $52 billion when the rupee hit its record low.

Reflecting the economy's weakness, net tax receipts in the first seven months of the fiscal year are about 7 per cent higher than the year-earlier period, the slowest pace in four years and well below the full-year budget target of 19 per cent. This could create a budget hole of some $2.4 billion, said the second official.

"We will need savings of up to Rs 50,000 crore if the shortfall in tax receipts is between Rs 10-15,000 crore," this official said.

Expected income of $8.8 billion from the sale of government stakes in state-run companies looks increasingly out of reach. The government could announce later on Friday the results of a sale of a 4 per cent stake in power transmission company Power Grid.

Based on the sales price and oversubscription, the sale will raise around $270 million, which would take the total amount raised so far from state asset sales this fiscal year to about $500 million.