* Budget to lay out plans to cut deficit
* Downgrade threat after sharpest slowdown in a decade
* Spending seen capped in 2013/14 at around 2012/13 levels
* May announce plans to widen tax net, cut subsidies
* Some populist measures likely with eye on 2014 election
By Ross Colvin and Rajesh Kumar Singh
NEW DELHI, Feb 28 Finance Minister P.
Chidambaram will present one of the most highly anticipated
Indian budgets of recent years on Thursday, a blueprint for
austerity that forms the centrepiece of India's efforts to stave
off a damaging credit ratings downgrade.
The 2013/14 budget caps an intensive seven-month campaign by
the energetic Chidambaram, who was appointed last August, to
turn around the fortunes of Asia's third-largest economy after
years of policy drift and global economic turmoil.
Chidambaram will likely spell out plans to narrow India's
fiscal and current account deficits, which have alarmed ratings
agencies and triggered warnings that the country's sovereign
bonds could lose their investment grade status and be downgraded
to 'junk' if urgent steps are not taken to rein in spending.
He is expected to announce plans to keep a lid on government
spending in fiscal 2013/14, capping it at roughly the same level
as the year ending next month, officials told Reuters, despite
fears that lower public expenditure risks deepening India's
sharpest economic downturn in a decade.
Economists say he may also unveil measures to widen the tax
net to boost government revenues, lay the groundwork for a goods
and services tax, reduce the government's huge subsidies bill,
sell more stakes in state-owned enterprises and raise import
duties to dampen demand for gold.
Investors will watch closely to see whether the three-times
finance minister - seen as a possible candidate for prime
minister in 2014 - will fulfil his promise of fiscal prudence or
sow the budget with vote-winning, but expensive, welfare
"Fiscal consolidation is the need of the hour, and ratings
agencies will sift through the finer budget details to judge
India's sovereign credit rating, which already has a negative
outlook at two ratings agencies," investment bank Nomura said.
When Chidambaram stands up in parliament at 11 a.m. (0530
GMT) to lay out the government's spending and fund-raising
priorities for the coming year, he will effectively start the
countdown to an election due by May 2014.
Despite the emphasis on fiscal prudence, there will likely
be some populist measures that will be key elements in the
ruling Congress party's campaign.
He is expected to highlight plans to expand the supply for
cheap grain for the poor at a total cost of more than $22
billion to the Treasury, and an ambitious direct cash transfer
programme for delivering social welfare payments and subsidies.
CREDIBILITY AT STAKE
Chidambaram has staked his reputation on hitting a fiscal
deficit target of 5.3 percent of GDP this year and 4.8 percent
in 2013/14. A no-nonsense, Harvard-educated, lawyer who commands
both respect and fear in government, he has squelched opposition
from cabinet colleagues worried that spending cuts could ignite
a backlash among voters.
Some ministries are bracing for funding cuts of up to 20-24
percent from their original 2012/13 targets.
Defence Ministry officials fear the cuts could force a delay
in weapons purchases by a country that has become the world's
largest arms importer in recent years.
"My sense is that (at) this point the critical action we
have to take is to try and re-accelerate growth, which is
difficult in a situation ... where we are also trying to
constrain spending," said Raghuram Rajan, Chidambaram's chief
economic adviser, speaking at a news conference on Wednesday.
"But if we constrain spending cleverly, we can actually do
Chidambaram has focused on winning back foreign investors
who were unnerved by proposals of his predecessor, Pranab
Mukherjee, to tax merger and acquisition deals retrospectively
and clamp down on tax evasion. He has implemented a spate of
investor-friendly reforms, including opening up the retail
sector to foreign supermarkets, since last September.
But Thursday's budget, his eighth, will be the biggest test
of his reformist credentials.
His last budget, in 2008/09, was widely credited with
ensuring the re-election of the Congress-led ruling alliance.
Flushed with funds, thanks to near-double-digit economic growth,
Chidambaram increased government spending in rural areas, the
Congress party's traditional "vote bank".
This year, however, the economic slowdown has left him with
little room for big-bang populist measures. The government
estimates economic growth for fiscal 2012/13 will be 5 percent,
nearly half of what it was in 2007/08.
In its annual economic survey released on the eve of the
budget, the finance ministry said the economic slowdown was a
"wake-up call for increasing the pace of actions and reforms".
It projected growth in the coming year of 6.1-6.7 percent.
Nomura said the credibility of Chidambaram's budget would
depend on the government's underlying assumptions on growth,
asset sales and subsidies.
Some government economic estimates in the past have proven
wildly over-optimistic. In the 2012/13 budget for example, the
government predicted the economy would grow at 7.6 percent,
sharply higher than the 5 percent that is now forecast.