NEW DELHI May 22 India's finance ministry is working on a proposal for the new government to cut welfare spending and rein in the deficit in its first budget, to allay fears of fiscal slippage that would increase the risks of a sovereign credit downgrade, officials said.
Two senior ministry officials told Reuters the plan would make it possible for Narendra Modi's incoming government to reduce the current year's fiscal deficit and save 250 billion rupees ($4 billion) in borrowing.
They said the proposal, to be presented to the country's next finance minister, would create room to narrow the deficit by up to 0.3 percentage points from the 4.1 percent of gross domestic product now budgeted.
Investors and ratings agencies have given Modi's pro-growth agenda a vote of confidence, but have expressed concerns that sluggish growth could cause the fiscal arithmetic in the previous government's interim budget to unravel.
The view from the permanent staff at the finance ministry is, however, that there is actually scope to trim the deficit and no need to let it slip - a risky move that could put India at the risk of a cut in its investment-grade sovereign rating.
"The fiscal deficit can surely be brought down to at least 3.8 or 3.9 percent as there is enough scope to cut down wasteful expenditure," one senior official directly involved in drafting the budget told Reuters.
Modi will be sworn in on Monday, and is widely expected to name close ally Arun Jaitely as finance minister. The revised budget is due to be presented to parliament in early July. (Reporting by Manoj Kumar; Editing by Douglas Busvine and Richard Borsuk)