India to cut welfare spending, deficit

NEW DELHI, May 22 (Reuters): India's finance ministry is working on a proposal for the new government to cut welfare spending and rein in the deficit in its first budget, to allay fears of fiscal slippage that would increase the risk of a sovereign credit downgrade.
Two senior ministry officials told the news agency 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 per cent 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 unravel.
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 per cent as there is enough scope to cut down wasteful expenditure," one senior official helping draft the budget told the news agency.
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 higher inflation.
"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 wanting."
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.