Two senior ministry officials told Reuters the plan would make it
possible for Narendra Modi's incoming government to reduce the
current year's fiscal deficit and save 250 billion rupees ($4
billion) in borrowing.
The proposal could create room to narrow the deficit by as much as
0.3 percentage points from the 4.1 percent of gross domestic product
now budgeted. It would be put forward for the next finance's
minister's consideration, and the government would decide whether to
follow its recommendations.
Investors and ratings agencies have given Modi's pro-growth agenda a
vote of confidence, but have expressed concern that a sluggish
economy could cause the previous government's fiscal arithmetic to
However, permanent staff at the finance ministry believe there is
scope to trim the deficit rather than see it widen in a way that
puts India's investment-grade sovereign rating at risk.
"The fiscal deficit can surely be brought down to at least 3.8 or
3.9 percent as there is enough scope to cut down wasteful
expenditure," one senior official helping draft the budget told
Politically, it will not be easy for Modi to take hard decisions
such as raising fuel prices in the first budget, given the risk of
"People are expecting that the first budget would be a sort of dream
budget," said Shumita Sharma Deveshwar, an analyst at Trusted
Sources consultancy. "I am not so sure that Modi is really going to
go and cut all the subsidies, and do everything that the market is
Some BJP advisers suggest ramping up spending on infrastructure to
support growth, and deferring tough decisions.
The new government will look at wasteful expenditure and oil
subsidies, said N.R.Bhanumurthy, an economist at the National
Institute of Public Finance and Policy, a Delhi-based think tank
partly funded by the government.
"But I am not very sure whether they are going to announce new
fiscal deficit numbers in the budget."
BOND PRICES, RUPEE RISES
Investors bought Indian bonds and the rupee on the news of the plan,
with yields on benchmark 10-year government bonds falling by 5 basis
points to 8.72 percent, and the rupee pushing to 58.43 to the dollar
from 58.51 previously.
Modi, to be sworn in on Monday, led his Hindu nationalist Bharatiya
Janata Party (BJP) to a landslide election victory. He is widely
expected to make ally Arun Jaitely finance minister.
The revised budget is due to be presented to parliament in early
July. BJP sources say the new government may scrap or revise the
deficit target in former finance minister P. Chidambaram's interim
The new government's first budget "will be a key indicator of Modi's
priorities and legislative agenda," Fitch Ratings said this week.
[to top of second column]
Savings could come from state subsidies and an employment guarantee
scheme for the rural poor, the finance ministry officials said. Both
are signature policies of the ousted Congress-led government.
Lowering the deficit even by 0.2 percentage points could reduce
government borrowings in the fiscal year that began April 1 by about
250 billion rupees ($4.25 billion) from an earlier estimate of 5.97
"The government can easily save 130-140 billion rupees on the rural
jobs programme," said another senior official, adding about 75
percent of spending on it was wasted.
He said the "Modi wave" in financial markets that propelled Indian
stock indexes to record highs could also make it easier for the
government to sell more shares in state-run companies.
The rupee's appreciation against the dollar should also help the
Modi government keep tabs on oil and fertiliser subsidies - a major
CAN BOTTLENECKS BE REMOVED?
India imports 80 percent of its crude oil needs. The government
covered about half of the $24 billion in losses that state-owned
fuel retailers incurred last fiscal year because of price controls.
The remainder was compensated through discounts from state-run
upstream oil companies.
Industry and rating agencies hope that Modi will pursue supply-side
reforms to unblock bottlenecks in the economy and reduce
inflationary pressures. Success could give the Reserve Bank of India
(RBI) room to ease interest rates.
But BJP officials said the first budget would offer a limited
opportunity for major policy shifts due to the inherited financial
"There are several central schemes which are either overlapping or
... lying under-utilised," said Nirmala Sitharaman, a senior BJP
spokeswoman. "It is one of the issues on which immediate attention
would be paid."
($1 = 58.7600 Indian Rupees)
(Additional reporting by Rajesh Kumar Singh; Editing by Douglas
Busvine and Richard Borsuk)
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