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India to tighten spending despite looming polls

MUMBA--India's finance minister is expected to tighten spending in an interim budget Monday and resist the temptation to announce a populist spending spree in a bid to stave off defeat at looming elections.

Finance Minister P. Chidambaram, of the embattled ruling Congress party, is expected to focus on fiscal consolidation in his budget speech to the Indian parliament, his final one before a national vote due by May.

“There is no room for populism. He will have to stay focused on the current account deficit, fiscal deficit and inflation,” said Vivek Rajpal, an interest rates strategist at Nomura Singapore Limited.

The government aims to limit the size of its fiscal deficit to 4.8 percent of gross domestic product for the current financial year, at a time when economic growth is at decade lows.

It hopes to make good on its aim thanks to higher-than-expected non-tax revenues such as those from the recent auction of mobile phone spectrum licenses, for which companies bid around US$10 billion.

Arun Singh, senior economist with research firm Dun & Bradstreet, said international credit agencies would be looking closely at the state of India's public finances.

“When they have already warned of an adverse impact on India's rating if this (deficit) figure worsens, the government really has no choice but to keep walking on a fiscal consolidation path,” Singh said.

'Red line'

Indian Prime Minister Manmohan Singh's administration has been widely criticized for its inability to stem corruption, boost growth and control India's inflation, leading voters to deliver a string of defeats in recent state elections.

In December, global ratings agency Fitch voiced concern that “a steeper political struggle to pull in more votes” might prompt the government to unleash a voter-pleasing spending spree before the polls due by May.

However the finance minister has dismissed talk of pre-poll giveaways and termed the fiscal gap target for 2013-14 as a “red line.”

Many economists, therefore, expect Chidambaram to announce an even lower fiscal deficit goal for the next financial year of around 4.2 percent to 4.3 percent of GDP, taking it closer to 3 percent by 2016-17.

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