* Finmin likely to raise fiscal deficit target to above 4.1
pct of GDP
* Growth seen at 5.4-5.9 pct for yr ending March 2015,
monsoon a risk
* Govt recommends cutting food, fertiliser subsidies
* Report calls for broadening of the tax base
(Adds ratings agency comment, background)
By Manoj Kumar
NEW DELHI, July 9 India's fiscal situation is
worse than it appears, Prime Minister Narendra Modi's government
said in an economic report on Wednesday that called for tough
measures to shore up public finances and reduce inflation.
The report's tone will increase speculation that Finance
Minister Arun Jaitley, in presenting his first budget to
parliament on Thursday, will give a higher, more realistic
fiscal deficit target for this fiscal year than the 4.1 percent
of gross domestic product the previous government set.
India risks losing its investment-grade sovereign rating if
it fails to get its finances into shape. Many economists believe
the last government's accounting understated the size of the
deficit, and Jaitley will need to present a credible recovery
plan to keep the ratings agencies onside.
The newly-released Economic Survey "shows the gravity of the
economic situation that needs correction," Jaitley told
reporters after ceremonially placing the report on a table in
"Inflation needs to be moderated further. The fiscal deficit
needs downward correction over the next two years," the former
corporate lawyer and career politician said.
An annual exercise, the Economic Survey is drawn up by
finance ministry advisers and delivered the day before the
Seen as a blueprint for the government's medium-term
economic planning, the report forecast GDP growth of between 5.4
and 5.9 percent in 2014/15. It warned that weak monsoon rains,
which are essential for farming, could keep growth closer to 5.4
In June, India's central bank forecast growth of 5.5 percent
in the financial year that ends in March 2015.
Jaitley's predecessor set the 4.1 percent fiscal deficit
target in an interim budget before the new government took
That may already be unrealistic, because the previous
government left a stack of unpaid bills to state oil companies
that have eaten into this year's finances.
A Reuters poll of economists this week predicted the
government would set a new deficit target of 4.4 percent.
D.K. Joshi, the principal economist at the Indian arm of
Standard & Poor's, CRISIL Ratings, said he would welcome a
higher deficit goal, as the number set by the last government
was always under a cloud of doubt.
"If 4.5 percent is credible and arrived in a correct manner,
then it shouldn't be a problem. It should be a feasible target,"
he said. "But if the fiscal deficit target is aggressive, it
would again be a question mark."
In May, S&P affirmed a negative outlook for India's credit
rating. Last year, it warned there was a one-third chance of a
downgrade to "junk" without a big improvement in the fiscal
deficit and in implementing reforms.
Wednesday's report recommended tackling food and fertiliser
subsidies to lower spending while broadening the tax base.
India's tax collection is less than 9 percent of GDP, a quarter
of the average in the OECD group of developed nations.
"It is better to achieve fiscal consolidation partly through
a higher tax-GDP ratio than merely through reduction in the
expenditure-to-GDP ratio, in view of the large unmet development
needs," the report said.
To balance the books, Jaitley is expected to set a high
target in the budget for the sale of government-held assets in
state-run and private companies.
Indian markets seemed reassured by the stern tone on fiscal
consolidation. Stocks reversed earlier losses, while
the 10-year bond yield eased to around 8.69
percent from 8.73 percent before the report.
Asia's third-largest economy has been stuck in its longest
rut in a quarter of a century - with growth below 5 percent -
while Modi's government has been dogged by a food-price spike in
its early weeks.
Modi, 63, won a landslide general election victory in May
with a pledge to boost growth and create jobs for the 1 million
people who enter India's workforce every month.
The budget for the current fiscal year was delayed by the
election, which handed Modi's Bharatiya Janata Party (BJP) the
strongest electoral mandate in India in three decades.
(Reporting by Manoj Kumar, Ratnajyoti Dutta, Nigam Prusty,
Suvashree Dey Choudhury and Krishna Das; Writing by Frank Jack
Daniel; Editing by Douglas Busvine and Richard Borsuk)