India’s Mukherjee to Borrow Record to Fund Budget Gap

By Cherian Thomas and Kartik Goyal

July 6 (Bloomberg) -- India’s Finance Minister Pranab Mukherjee announced plans to borrow a record 4.51 trillion rupees ($93 billion) to fund budget spending on roads, power and aid for the poor. Stocks, bonds and the currency slumped.

Unveiling the budget for the year to March 2010, Mukherjee said India’s fiscal deficit is expected to widen to a 16-year high of 6.8 percent of gross domestic product from a revised 6 percent. Indirect taxes will be streamlined through a goods and services tax, he said in his speech in New Delhi today.

Prime Minister Manmohan Singh’s government is spending more to speed up economic growth and reduce poverty in a nation where malnutrition is worse than Sub-Saharan Africa. Stocks and the currency weakened on investor disappointment that Mukherjee didn’t announce major asset sales and concerns a ballooning budget deficit may lead to a credit-rating cut.

“The budget has failed to instill confidence as to how the government will achieve fiscal consolidation,” said Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda in Mumbai. “With this kind of a deficit, there is a possibility that India’s rating may be downgraded.”

The Bombay Stock Exchange’s Sensitive Index fell the most in six months, declining 5.8 percent to 14,043.40 at the 3:30 p.m. close in Mumbai. The rupee weakened 1.3 percent, the most in almost six weeks, to 48.5375 against the dollar. The yield on the most-traded 6.07 percent note due May 2014 surged 22 basis points, the most since March 17, to 6.45 percent.

Election Victory

Mukherjee, 73, provided for only 11.2 billion rupees this year from the sale of stakes in state-run companies. Advisors to the finance minister, in a report on July 2, estimated the government could raise as much as 250 billion rupees annually over the next five years from asset sales.

Investor expectations of an acceleration in asset sales had surged after Prime Minister Singh won a stunning re-election victory in May, reducing his dependence in parliament on allies such as the communists who had opposed such offerings.

“Any downgrade would adversely affect the outlook for foreign investments into the country and hurt growth,” said Chetan Ahya, a regional economist at Morgan Stanley in Singapore.

Standard & Poor’s, which places India’s long-term local currency rating at BBB-, their lowest investment-grade level, said the 6.8 percent budget deficit for the year to March 2010 is “within the boundary of our expectation,” downplaying the risk of an immediate rating downgrade.

Credit Rating

Moody’s Investors Service has a rating of Ba2, two levels below investment grade, on India’s local-term local currency bonds, while Fitch Ratings have a BBB- long-term rating on India, their lowest investment-grade level.

Prime Minister Singh’s government plans to overhaul subsidies and is banking on 8 percent to 9 percent economic growth in the next two years to boost tax revenue and reduce the budget deficit to 5.5 percent of GDP by March 2011 and to 4 percent in the following 12 months.

“The proof of the pudding will be in the eating on this one,” said Robert Prior-Wandesforde, regional economist at HSBC Group Plc in Singapore. “India remains a long way from achieving a 9 percent growth rate on a sustained bases and will need a lot more in the way of infrastructure spending.”

India’s record growth of close to 9 percent in the five years ended March 31 helped tax revenue more than double since 2004. The $1.2 trillion economy expanded 6.7 percent last year, the slowest pace since 2003.

Infrastructure Spending

Today’s budget also allocates more to ports, power, roads and other infrastructure, where inadequacies shave about two percentage points off India’s growth rate, according to the finance ministry.

A goods and services tax will be introduced from April 1 next year, which will subsume all indirect taxes and will levy only value-added production so that manufacturers don’t pay taxes twice. The fringe benefits tax will be scrapped.

Mukherjee, who ran a closed economy as the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, returned to the portfolio this year after serving as the defense and foreign minister during the bulk of Singh’s first five-year term.

To fulfill the government’s election promise, Mukherjee announced plans to provide rice and wheat at a subsidized rate of 3 rupees a kilogram. He also raised wages under the National Rural Employment Guarantee Act, which provides 100 days of work in a year to one member from a poor family.

Singh’s government wants to sustain growth rates of over 9 percent to help reduce poverty. The World Bank estimates 76 percent of Indians live on less than $2 a day, compared with 72 percent in the Sub-Saharan African nations. According to India’s National Family Health Survey, the child malnutrition rate in India is 46 percent, double that in Sub-Saharan Africa.

“The first challenge is to revert the economy back to the high GDP growth rate of 9 percent per annum at the earliest,” Mukherjee told parliament today. “The second challenge is to deepen and broaden the agenda for inclusive development.”