Rupee recovery a budget relief for India

A cashier counts Indian rupee currency notes inside a bank in Mumbai yesterday. A recovery in the rupee is giving India’s Finance Minister P Chidambaram rare relief in his battle against a threatened credit rating downgrade by reducing pressure on the government’s subsidy bill.

Reuters/New Delhi

A recovery in the rupee is giving India’s 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% 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% 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 $12bn from a previous estimate of $15bn, these officials said.

Other budget headaches mean he will have to find about $8bn 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.

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 $36bn for subsidies, but that swelled to $52bn 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% higher than the year-earlier period, the slowest pace in four years and well below the full-year budget target of 19%. This could create a budget hole of some $2.4bn, said the second official.

“We will need savings of up to Rs50,000 crore ($8.1bn) if the shortfall in tax receipts is between Rs10-15,000 crore ($2.4bn),” this official said.

Expected income of $8.8bn 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% stake in power transmission company Power Grid.

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

The government still hopes to bring in nearly $3.5bn more by selling its remaining stake in Hindustan Zinc  and Bharat Aluminium Co (BALCO) before the end of the fiscal year.

“The disinvestment numbers are there in the budget. But it appears that we are going to miss them by a wide margin, like every year,” said the second senior official.

In the absence of the share sales, Chidambaram told his cabinet colleagues on Tuesday that money would have to be raised by pressing state firms to buy back government shares or to issue a special dividend, said the first senior official citing a description of the meeting by Chidambaram.

Prime Minister Manmohan Singh had called the meeting to discuss the sale of the government’s share in state-run coal producer Coal India and power equipment manufacturer BHEL.

Chidambaram also hopes to make savings by strictly implementing rules on allocating funds to other ministries, which will slow down how quickly they receive the money, the first official said.

“We are expecting savings of about Rs40-50,000 crore ($6.5bn to $8.1bn), though the numbers still have to be finalised,” this official said.

Non-spending of allocated funds could help in achieving the budget deficit target, the finance ministry’s spokesman said.

The revenue position will be clearer by the end of December, by which time Indian companies will have deposited their advance tax payments for the third quarter.

The government expects major savings from ministries like drinking water and sanitation, rural development, defence, trade, communications, power and planning.

In April to October, the deficit reached about 84% of the full-year target.