Monday February 16, 02:04 PM
India says good times over, warns deficit must go up
By Penny MacRae
NEW DELHI (AFP) - India's government abandoned fiscal caution and hiked spending to arrest an economic slowdown in a pre-election mini-budget Monday in which it warned that the good times were over.
The government also sharply boosted the defence budget following the Islamic militant attacks on Mumbai last November, saying the security climate in the subcontinent had "deteriorated considerably."
The Congress-led government, whose five-year mandate expires in May, said the economy had enjoyed a "dream run" with average annual growth of close to nine percent which was "much faster than ever before."
But acting finance minister Pranab Mukherjee said the global slump meant more spending was needed to spur domestic growth as he presented the interim budget to tide over India's finances until a new government takes office.
"Extraordinary economic circumstances merit extraordinary measures," he told parliament.
"Employment generation schemes have to be expanded and social security nets have to be strengthened to protect the vulnerable sections of our society," he said, signalling Congress's campaign priorities in the polls due in April-May.
Congress owed its surprise 2004 election win to India's impoverished masses, who voted out the Hindu nationalist Bharatiya Janata Party because they felt bypassed by an economic boom.
The slowing economy, mounting job losses and national security are expected to be top issues in the campaign.
The government expects growth to slacken this year to 7.1 percent -- the weakest in six years. Economists warn the economy could lose more steam next year, slowing to 5.5 percent, still strong by current world standards but not enough to lift millions of Indians (INDN.PK - news) from poverty.
Mukherjee announced a 24 percent rise in defence spending for next year -- the highest since independence in 1947 -- saying the Mumbai attacks in which 165 people died gave "an entirely new dimension to cross-border terrorism."
India has fast-tracked defence spending to update its military equipment following last November's attacks which New Delhi has blamed on Pakistan-based militants.
The rise in spending means the fiscal deficit would be 6.0 percent of gross domestic product for this financial year to March 2009 -- more than double the government's target of 2.5 percent and the highest in nearly two decades.
Mukherjee projected next year's deficit at 5.5 percent although many analysts called the estimate conservative and forecast it would be 6.5 percent.
"Conditions in the year ahead are not likely to be normal and, therefore, the high fiscal deficit is inevitable," he said. "Expenditure may have to be increased substantially if we are to give the economy the stimulus it needs."
The higher spending will have to be financed through borrowing, and rating agencies have warned a deficit rise could lead to rating downgrades and deter investors from buying Indian debt. India's combined state and central government deficit is one of the world's worst at around 10 percent.
Mukherjee said the government would give the "highest priority" to the "common man," promising more interest rate subsidies for debt-hit farmers and spending on rural infrastructure, education, jobs and other sectors.
But the lack of any detailed new spending plans disappointed investors and pushed India's benchmark Sensex 30-share index down by 3.42 percent or 329.29 points to 9,305.45.
The mini-budget "was completely a non-event," said Pradeep Jain, chairman of real estate group Parsvnath Developers.
"Attention is now bound to refocus on the central bank and to what extent it is prepared to cut rates further" to spur the economy, said HSBC (LSE: HSBA.L - news) economist Robert Prior-Wandesforde, adding "some sort of action looks imminent."
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