Early poll would put fiscal targets at risk

Signs India's ruling coalition is loosening its purse strings to shore up voter support as a political impasse points to early elections could jeopardise a target to reduce the federal fiscal deficit.

The budget gap has almost halved to 3.5 per cent of gross domestic product in 2006/07 from five years earlier as a rapidly expanding economy boosted government revenues. But an expected hefty pay rise for government workers, plans to keep fuel prices low, and new welfare schemes for India's poor - a massive voter bloc - could inflate the deficit again.

If such populist spending goes unchecked, the fiscal deficit will swell back above 4 per cent of GDP, analysts say, especially as economic growth is seen slowing from the blistering 9.4 per cent pace in the year to the end of this March - the fastest growth in 18 years.

"Most of the steps taken by the government in the recent past would be negative from a fiscal deficit perspective," said Harish Menon, economist with ING Vysya Bank. "But the think-tank are probably counting on a higher GDP base to achieve the fiscal responsibility and budget management targets," he said, referring to the finance ministry.

The fiscal responsibility acts binds the government to cut the federal deficit to 3 per cent of GDP by 2009, but early elections could mean abandoning prudent economics in favour of populist spending. Slowing growth and higher spending would force the government to rely more on borrowing, which could push up local interest rates.

So far the government bond market has not shown too much concern about the spending plans, focusing instead on the prospects of another increase in bank reserve ratios as the central bank fights a fast-rising rupee. But analysts say market concern about the budget deficit could grow if an early election looked more likely.

ELECTION
The next federal election is due in May 2009 and an early election is by no means certain. But speculation of one has mounted after nearly two months of deadlock between Prime Minister Manmohan Singh's government and its communist allies over a nuclear energy deal with the United States.

The fiscal deficit has narrowed in recent years largely because quicker economic growth boosted revenues, rather than owing to spending discipline or reform. Growth has averaged 8.6 per cent over the last four fiscal years.

Courtesy:Economics Times
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