People browse through goods displayed in street vendor stalls in Mumbai. India’s inflation slowed to near a one-year low, giving the central bank more room to cut interest rates to stimulate economic growth.

India’s budget deficit may be three times the targeted figure, as the government steps up spending to arrest an economic slowdown, Suresh Tendulkar, the top economic adviser to Prime Minister Manmohan Singh, said.

Singh’s government wrote off 717 billion rupees (US$14.7 billion) in farm loans and raised salaries of five million government employees by 21 percent in the past nine months ahead of general elections in April.

Since December, it has cut taxes and announced an extra 200 billion rupees of spending to protect the economy from the global recession.

“India’s fiscal woes are multiplying,” Rajeev Malik, an economist at Macquarie Capital Securities in Singapore, said. “The populist spending initiatives were announced well before the fiscal boost became fashionable. Whatever the original motivation, the spending will be useful in cushioning the hit to growth.”

India’s rupee pared earlier gains after Tendulkar’s comments. The currency traded at 48.7925 per dollar as of 10:27 a.m. in Mumbai, compared with 48.81 on Wednesday, according to data compiled by Bloomberg. It rose as high as 48.775 earlier.

Slower growth

The central bank last week cut its economic growth forecast for the year ending March 31 to 7 percent from between 7.5 and 8 percent.

Slowing growth is putting the brake on tax collections, further impairing government finances.

India’s personal and corporate tax collections rose 12.5 percent to 2.47 trillion rupees between April 1 and

January 31, S.S.N. Moorthy, chairman of the Central Board of Direct Taxes, said Wednesday. That compares with a target of 3.65 trillion rupees by March 31.

Tendulkar said the current global recession is an “extraordinary situation” that requires higher public spending.

“The usual concern about the budget deficit is that it crowds out private investment,” Tendulkar, who is the chairman of Singh’s Economic Advisory Council, said. “But when the economy is on the downturn and investment is sluggish, it will not crowd out private investments.”

‘Fiscal consolidation’

He said the combined budget deficit of the federal government and the states will be close to 10 percent of GDP.

“When the economy recovers, we need to get back to fiscal consolidation,” Tendulkar said.

“There will be pressure on the rating companies to downgrade India’s credit rating,” D. H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi, said. “So far they have resisted, probably on optimism of India’s growth prospects.”

India’s investment-grade credit ratings were maintained by Standard & Poor’s on October 31 on expectations the nation’s economic expansion will not be hurt by a global slowdown.

S&P said it affirmed India’s BBB-long-term credit rating, the lowest investment category. S&P had raised India’s long-term rating by one notch in January 2007.

Still, Tendulkar said the onus of boosting India’s growth falls on monetary policy, because “there are limitations in the fiscal space.”

India’s central bank kept interest rates unchanged last week after lowering them to a record on January 2 to help shield Asia’s third-largest economy from a global slump. The Reserve Bank of India’s reverse repurchase rate is at 4 percent and the repurchase rate at 5.5 percent.

“The central bank must see the implications of the borrowing program before it next sets rates,” Tendulkar said. “They have to figure out how to maintain liquidity supply. My guess is they would cut rates after seeing the interim budget.”

Inflation slows

Inflation slowed to near a one-year low, giving the central bank more room to cut interest rates to stimulate economic growth.

Wholesale prices climbed 5.07 percent in the week to January 24 from a year earlier after gaining 5.64 percent the previous week, the commerce ministry said Thursday. Economists expected an increase of 5.25 percent.

Central bank governor Duvvuri Subbarao said last week inflation would slow to below 3 percent by March 31 and indicated rates would be cut to help the economy weather the global recession. A top aide of Singh said Thursday that rate cuts may come after the government’s interim budget on February 16.

“Interest rates are bound to fall as prices ease and the economy slows,” N. R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi, said. “The central bank will have to assess the government’s borrowing program before it set interest rates.”

The central bank would “have to figure out” the liquidity needed in the banking system after seeing the government’s borrowing program for the financial year starting April 1, Tendulkar said.

Singh’s government will announce an interim budget on February 16 because its five-year term ends in May this year.

Thursday’s inflation rate may be revised in two months, after the government receives additional price data. The commerce ministry cut the inflation rate for the week ended November 29 to 7.86 percent from 8 percent.

Source: Bloomberg