India to Put Investors Before Voters in Election-Year Budget

India Finance Minister P Chidambaram
Sam Panthaky | AFP | Getty Images

India's finance minister had abruising battle with cabinet colleagues in the run-up to thebudget he unveils this week, rebuffing demands for pre-electionspending and insisting on austerity to shore up investors' faithin a troubled economy.

Aides to P. Chidambaram said the eloquent Harvard-educatedlawyer finally convinced leaders of his Congress party that moreprofligate spending would make a sovereign rating downgrade to'junk' status inevitable and could trigger an economic meltdown.

In pushing for austerity, officials said Chidambaram met noopposition from Prime Minister Manmohan Singh - architect of the1991 economic reforms that led to the "Incredible India" story -or from the welfare-minded leader of the Congress party, SoniaGandhi, pointing to increasing acceptance of the depth ofIndia's economic problems.

"He wants to send out a credible and strong signal thatIndia is on the right track," said one senior official privy tothe secrecy-shrouded preparations for the 2013/14 budget. "Heapprehends that yet another failure to honor fiscal commitmentscould end the India story."

Chidambaram has staked his reputation on meeting deficitcutting targets, embarking last month on a road show offinancial centers where he sought to reassure foreign investorsthat India was serious about getting its fiscal house in order.

Several officials involved in budget planning told Reutersthat tackling the bloated fiscal deficit will be the centerpiece of Chidambaram's presentation to parliament on Thursday.

They said his budget has also been crafted to avoidunnerving investors, who were dismayed last year by plans to taxmerger and acquisition deals retrospectively and clamp down ontax evasion.

Together with a widening fiscal gap, the tax moves triggereda flight of capital from Asia's third-largest economy. The rupeewas hammered and, with exports and foreign direct investmentslowing, fears of a balance of payments crisis mounted.

New Delhi missed its fiscal deficit target of 4.6 percent ofgross domestic product (GDP) in 2011/2012 by 1.2 percentagepoint because of over-spending on social welfare and subsidies,prompting credit rating agencies to threaten a downgrade thatwould make India the first of the BRICS emerging economies tolose its investment-grade status.

(Read More: India's Investment Malaise Thwarting Quick Economic Rebound)

Chidambaram has repeatedly pledged to lower the deficit to5.3 percent of GDP this fiscal year and 4.8 percent in 2013/14.But with economic growth languishing around 5.5 percent afterthe sharpest slowdown in a decade, the finance minister cannotrely on tax revenues to meet his goals.

The finance minister told a budget meeting last month thatIndia had no alternative to meeting the fiscal deficit targetand a slippage could have dire consequences, according to asenior bureaucrat who was present at that meeting.

Officials told Reuters that he has already slashed publicspending in the current fiscal year that ends in March by some 9percent from the original target and for 2013/14 he plans to capit roughly at the same level.

In a Reuters poll conducted earlier this month, 18 out of 23economists predicted that the focus of Chidambaram's budgetspeech will be on slashing subsidies and government handouts.

Letters to the Minister

That is not what other ministers wanted from the budget asthe government - mired in corruption scandals and widely deridedas incompetent in the face of the economic slowdown - faces astruggle for re-election in polls due by May, 2014.

Officials say that the rural development minister argued inone letter to Chidambaram against spending cuts that would hithousing and road construction in poor rural areas, on which theCongress party has traditionally relied for votes. He wroteagain this month to avert a possible cut in funding to a ruralemployment guarantee scheme.

The tribal affairs minister wrote twice to Chidambaram toplead against cuts in welfare spending, worried that they couldalienate tribals, who traditionally vote for the ruling Congressparty. And the defense minister complained that budget cutswould hobble a grand plan to modernize India's armed forces.

(Read More: India Inflation Slows to More Than 3-Year Low in January)

Chidambaram wants these ministers and the railways ministerto prioritize their spending, focusing primarily on criticalprojects, but has held out the prospect of additional funding ifrevenues pick up later in the year.

In a measure of the many demands Chidambaram faced, thePlanning Commission - a powerful body of government advisers -sought an increase of at least 15 percent in capital spendingover this year's original target to underpin growth. But he wasready to provide for a rise of just about 6 percent from actualspending.

"You can provide money only if you have money," said a topofficial at the Finance Ministry.

As well as keeping a lid on expenditure, Chidambaram isexpected to announce steps to maximize revenues through moreefficient tax collection, fewer tax exemptions and higherproceeds from the partial privatization of state-controlledcompanies.

But, wary of dealing another blow to investors' confidence,proposals for higher taxes on the super-rich that were floatedearly this year appear to have been ruled out.