New Delhi faces need to cut deficit for higher growth

New Delhi : India's government must do more to narrow its budget deficit to promote long-term growth and tame inflation, Reserve Bank of India Governor Duvvuri Subbarao said.

"In India, it's not growth versus austerity, but austerity for growth," Subbarao said yesterday in a panel discussion moderated by Charlie Rose in Washington, where the central bank chief is attending meetings of the International Monetary Fund and Group of 20 nations. "The government has to cut its fiscal deficit in order for growth to increase."

Moody's Investors Service, Fitch Ratings and Standard & Poor's have cited public finances as hampering India's credit rating, which is at the lowest investment grade level at each company.

India's Finance Minister Pranab Mukherjee in his March 16 budget proposal sought a cap on a subsidy programme that stretches from diesel to fertilisers and asked for tax increases, trying to narrow the budget gap.

He projected record borrowing needs of Rs5.69 trillion (Dh406.4 billion) to plug a fiscal shortfall estimated at 5.1 per cent of gross domestic product (GDP) in the year starting April 1, 2012. Mukherjee said the gap for the 12 months through March 31 will be 5.9 per cent of GDP, wider than the 4.6 per cent target set in 2011.

Fiscal consolidation

India was on a path to fiscal consolidation before the global financial crisis, and then had to undertake crisis-driven fiscal stimulus measures, Subbarao said yesterday. While the nation has "recovered sooner than most other countries," its deficit continues to rise.

"That is adding to inflation," Subbarao said. "It is militating against long-term growth drivers."

India's expansion has been hurt by declining investment and moderating consumer spending after the Reserve Bank raised rates by a record 3.75 percentage points from March 2010 to October last year to fight inflation. Policy gridlock has also hampered growth in the $1.7 trillion (Dh6.25 trillion) economy.

Growth focus

The RBI reduced interest rates by a greater-than-forecast half a percentage point on April 17, seeking to bolster growth with the first reduction since 2009. At the same time, the Reserve Bank signalled the fastest inflation among the biggest emerging economies might limit the room for further cuts.

"The government must make a stronger commitment to fiscal consolidation so that the private sector isn't crowded out of the credit markets and the economy will become more efficient," Subbarao said.

India's benchmark wholesale-price index rose 6.89 per cent in March from a year earlier, exceeding the median 6.65 per cent estimate in a Bloomberg News survey of 33 economists.

Indian GDP probably expanded 6.9 per cent in the year through March 31, 2012, the least in three years, according to government estimates.