India ups spending to spur growth, deficit hits markets

By Surojit Gupta and Tony Munroe

NEW DELHI (Reuters) - India said its fiscal deficit would widen as it increases spending on infrastructure and help for farmers, disappointing investors who had hoped the new government would use its strong re-election mandate to usher in a wave of pro-market reforms. Stocks fell 5 percent and bond yields spiked after Finance Minister Pranab Mukherjee, sticking to the ruling Congress party's theme of "inclusive growth," said on Monday that the fiscal deficit for the year ending March 2010 would increase to 6.8 percent of GDP.

Investors had expected the fiscal deficit to grow to up to 6.5 percent as the government ramped up borrowing and spending to spur economic growth, from 6.2 percent in the previous year. (See for an analysis on the impact on bond markets)

The first budget of Prime Minister Manmohan Singh's new administration, seen as a roadmap for how he will govern for the next five years after his Congress party-led coalition was reelected by an unexpectedly decisive margin, focused heavily on farmers and the poor.

"The real concern emerging from the budget is that it has not given confidence as to how the government will go about the fiscal consolidation process, after hiking the fiscal deficit target," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

"While the thrust on agriculture, infrastructure, etc., augurs well from a long-term growth perspective, the fiscal profligacy is quite obvious in the near term," Nitsure said.

Budget documents show the government's gross market borrowing in the current fiscal year would total 4.51 trillion rupees ($93.4 billion), 14 percent higher than a Reuters poll forecast and 23 percent higher than the borrowing target cited in an interim budget in February.

"The first challenge is to return the GDP growth rate of 9 percent per annum at the earliest," Mukherjee said in his address to parliament. "The second challenge is to deepen and broaden the agenda for inclusive development."

Some market watchers expressed concern that Mukherjee did not unveil significant reforms nor provide details on plans by the government to sell stakes in state-controlled companies.

"He did not come out with key policy changes - PSU (public sector undertaking) disinvestment, securities transaction tax, raising FDI (foreign direct investment) limit for banking and insurance and FII (foreign institutional investor) limit for key sectors," said Madhavi Vora, managing director, ULJK Securities.

"It is really a big disappointment," she said.

DEFICIT WOES

Mukherjee said overall spending would increase by 36 percent this year, but also called for a return to fiscal responsibility targets "at the earliest."

His budget document said the fiscal deficit target would be closer to 3 percent of GDP in the year that ends in March 2012, assuming a global economic recovery.

He said states should remove bottlenecks for infrastructure projects, and outlined plans for more flexible financing for infrastructure and development of long-distance gas pipelines.

Inadequate power supplies and transport links have long choked India's growth potential.