India cuts growth forecast, warns on trade balance, deficit

India slashed its full-year growth forecast on Friday amid slowing domestic and global demand, with officials warning the government was facing a serious balance of trade problem and will have a tough time meeting its fiscal deficit target. Asia's third-largest economy is now expected to grow by 7.25 to 7.75 percent in the fiscal year ending next March, the government said in a mid-year review, down sharply from an estimate of 9 percent issued in February.
The slowing economy has put government finances under further stress, fuelling a recent sell-off in the rupee. While tax receipts so far have lagged the budgeted estimates, expenditures are climbing at a faster clip. "There can be no denial that meeting the target (of fiscal deficit) will not be easy this year," the finance ministry said in its review, without giving a revised forecast.
Separately, the trade deficit for the fiscal year ending March 2012 is expected to sharply widen to $155-$160 billion from $104.4 billion a year ago, posing further downside risks to the weak Indian currency. Slowing demand for Indian merchandise in overseas market is also making the government uncertain about achieving its annual export target of $300 billion.
"There is clear evidence of a deceleration in exports growth," said Rahul Khullar, trade secretary, after releasing the provisional trade data for November. "There is a serious balance of trade problem." Net tax revenues have grown at just 7.3 percent year on year in the first seven months of 2011/12, while expenditure has jumped by about an annual 10 percent.
Adding to the gloomy outlook, the government said raising a budgeted 400 billion Indian rupees ($7.7 billion) via stake sales in state-run companies in choppy market conditions would be hard to achieve. "There can be no denial that meeting the target (of fiscal deficit) will not be easy this year," the finance ministry said in its review, without giving a revised forecast.
With less than four months of 2011/12 still remaining, economists say the full-year fiscal gap may be almost one percentage point higher than the budgeted target of 4.6 percent of GDP. The fiscal deficit has already reached nearly 74 percent of the full-year target. Any slippage on the fiscal front is expected to force the cash-strapped government to borrow more from the market. It has already unveiled 528 billion rupees of extra borrowing for the remainder of this year.
The government blamed its rising subsidy bill for higher expenditures but said it is determined to keep any slippage in the fiscal deficit target to a minimum level. Early this week, the government forecast its subsidy bill for the full year to rise by 1 trillion rupees.