India plans to cut some government spending to help fund drought relief and a rural job scheme and ensure that market borrowing will be within the government's annual target, senior officials said on Tuesday.
A global economic slowdown and then the worst dry spell in nearly four decades have raised concern the government may overshoot its 10 trillion rupees ($206 billion) spending plan for 2009/10 (April/March), leading to higher borrowing.
But senior finance ministry officials said the government would stick to its record borrowing of 4.51 trillion rupees for the current fiscal year, and could even end up borrowing less if it cuts down on unproductive expenses.
Late on Monday, the finance ministry said every government department will have to cut spending on costs such as domestic and foreign travel and office expenses by 10 percent.
"I have suggested that at least 10 percent of non-plan expenditure should be reduced. Of course, I have excluded security, defence and certain operational costs," Finance Minister Pranab Mukherjee told a news conference.
But Mukherjee said the government should not reduce spending announced since December to pump-prime the economy.
Growth in Asia's third largest economy fell to 6.7 percent in 2008/09, from 9 percent or more seen in previous three years. Policy makers expect it to be above 6 percent in 2009/10.
Worries of a rising deficit have pushed up bond yields, and the comment helped yields ease to 7.36 percent from at 0945 GMT, off an early high of 7.38 percent, but above Monday's close of 7.29 percent. Finance Secretary Ashok Chawla said borrowing may be reduced if savings generated by expenditure cuts are "huge".
Indian federal and central bank officials will meet in 10-12 days to finalise the government's borrowing plan for the second half of the fiscal year ending March 2010, he said.
The government has sold 2.82 trillion rupees ($58 billion) of bonds so far this fiscal year from the 2.99 trillion rupees targeted in the first half ending September 30. It plans to raise a record 4.51 trillion rupees in the fiscal year 2009/10.
"This statement is definitely a signal that the government is looking to return to fiscal consolidation, but the proof of the pudding is only in the eating," said Atsi Sheth, chief economist at Reliance Equities. "There are very few avenues to cut expenditure and many of them involve a delay in several important capital and social projects," Sheth said.
The federal fiscal deficit is expected to widen to 6.8 percent of gross domestic product (GDP), a 16-year high, and economists estimate drought relief measures may widen the deficit by another 0.5 percent of GDP. 10-year benchmark bond yields have risen by 159 basis points so far this year.
A finance ministry official who declined to be named said the government may complete its record borrowing plan by end February and reduce the size of weekly auctions to 100 billion rupees in the second half of the year starting October 1. The government sold 120 billion rupees of bonds every week from July 4 to August 28, barring one week. This week it is expected to sell 110 billion rupees of debt.
The government's cash position is satisfactory now and there is no need to issue cash management bills in the near future, the official told reporters. Expenditure Secretary Sushama Nath told reporters the finance ministry will stick to its spending target of 10 trillion rupees for the current fiscal year ending March 2010.