Union Budget 2013: Fiscal deficit could be the gamechanger

Reining in the bloated fiscal deficit will likely be the centrepiece of Finance Minister P. Chidambaram's Budget to be tabled today. He is planning to cut the public spending target for fiscal 2013-14 by up to 10 per cent from the original target, in what would be the most austere budget unveiled in recent history as he tries to avert a sovereign credit downgrade.

India is likely to hit its fiscal deficit target of 5.3 per cent of gross domestic this year despite a significant shortfall in revenue, the Economic Survey for 2012-13 said on Wednesday. But it remains the looming threat going forward, and Mr Chidambaram has committed to controlling the deficit at 4.8 per cent in the next financial year.

Critics warn that at a time when both private investment and consumer demand are weak, lower public spending risks deepening India's sharpest economic slowdown in a decade.

But Mr Chidambaram has argued that a lower fiscal deficit will not only avert a rating downgrade threat but also bolster economic growth prospects as borrowing costs for private investors will fall, helping lift capital investment growth from a five-year low.

New Delhi missed its 2011-12 fiscal deficit target of 4.6 per cent of gross domestic product by 1.2 percentage points, prompting threats of a downgrade from ratings agencies Fitch and Standard & Poor's.

India has a BBB minus rating with a negative outlook from both S&P and Fitch, the lowest investment grade among the BRIC group of large emerging economies. A cut would take the country's credit rating to junk status.

The Finance Minister has staked his reputation on meeting deficit cutting targets, embarking last month on a road show of financial centres where he sought to reassure foreign investors that India was serious about getting its fiscal house in order.

With inputs from Agencies