India seeks seven-year low deficit ahead of elections

PUBLISHED : Tuesday, 18 February, 2014, 4:34am
UPDATED : Tuesday, 18 February, 2014, 4:34am

India's government pledged to reduce the fiscal gap to the lowest in seven years in an interim budget before elections due by May, while boosting defence spending and temporarily reducing taxes on goods from cars to mobile phones.

The budget deficit will narrow to 4.1 per cent of gross domestic product by March next year from an estimated 4.6 per cent in the current fiscal year, lower than an earlier target of 4.8 per cent, Finance Minister Palaniappan Chidambaram said yesterday.

Prime Minister Manmohan Singh faces a slumping economy that is hurting tax revenues as rupee weakness raises the cost of oil imports and fuel subsidies.

Standard & Poor's warned in November last year that it might strip India of an investment-grade rating awarded in 2007 unless the election led to a government capable of reviving growth.

"Analysts and rating agencies acknowledged our efforts some months ago and no longer speak about the downgrade," Chidambaram said.

He said the current account deficit would be contained at US$45 billion in the current fiscal year, compared with US$88 billion last year. The government also expects to add US$15 billion to foreign reserves.

Excise tax rates on sport utility vehicles, mobile phones and small cars would be cut until June 30, Chidambaram said, while urging lawmakers to pass a goods and services tax.

Defence spending would rise about 10 per cent to modernise the country's military, he said.

Reserve Bank of India governor Raghuram Rajan said a lower deficit was crucial to curbing inflation and boosting growth.