India announces plan to cut fiscal deficit to 3% of GDP

After years of policy paralysis that eroded investor confidence and slowed growth to a near three-year low, the government last month launched a bid to boost the economy with a slew of reforms in retail, aviation and broadcasting.

“As fiscal consolidation takes place and investors' confidence increases, it is expected that the economy will return to the path of high investment, higher growth, lower inflation,” said Finance Minister P. Chidambaram.

“We think we have a doable fiscal consolidation plan,” he told a news conference in New Delhi, hinting at tough cost-cutting measures to shore up government finances.

Chidambaram said the government is targeting a fiscal deficit of three percent of GDP by 2017, down from 5.8 percent of GDP last year.

But he added that the government's flagship anti-poverty programs would remain. Analysts have warned the government must slash large subsidies to curb its ballooning fiscal deficit.

“The poor must be protected and others must bear their fair share of the burden,” Chidambaram said.

“The burden of fiscal correction must be shared, fairly and equitably by different classes of stakeholders,” he added.

The Indian economy expanded at near double-digit rates between 2005 and 2011, but the International Monetary Fund forecasts just 4.9 percent growth for the current fiscal year.

Standard & Poor's (S&P) warned this month there was “at least a one-in-three likelihood” of a downgrade of India's sovereign credit rating within the next 24 months from investment grade to junk.

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