May 31, 2012 / 2:21 PM / 7 years ago

India's austerity measures not enough, say analysts

NEW DELHI (Reuters) - India announced a series of austerity steps on Thursday, including a 10 percent cut in non-plan expenditure for this fiscal year, which analysts said were not enough and would not have much impact on the country’s overall spending.

Asia’s third-largest economy is struggling to contain its fiscal deficit, which widened to 5.097 trillion rupees ($90.86 billion), or equivalent to 5.76 percent of its gross domestic product, in the 2011/12 fiscal year.

The cut in non-plan spending excludes interest payment, debt repayment, defense capital, salaries, pensions, and grants to states, a statement released by the finance ministry showed.

“The cut takes care of discretionary spending and this is basically a salutary measure.... This won’t have a material impact on the overall spending,” Gaurav Kapur, senior economist at Royal Bank of Scotland, said.

The excluded categories comprise about 72 percent of India’s non-plan expenditure, estimated at 9.70 trillion rupees for the current 2012/13 fiscal year, said Nitesh Ranjan, an economist with the Union Bank of India.

“The government needs to take more credible actions for containing the fiscal deficit. I do not think such austerity step(s) will go well with investor sentiment, for whom it is intended,” Ranjan said.

But not all analysts share the view.

Saugata Bhattacharya, an economist with Axis Bank said, the austerity drive was a small, but necessary step.

“Everything now is sentiment driven... The government needs to be seen doing something,” Bhattacharya said.

On Thursday, India’s economic growth slumped to its lowest level in nine years in the first three months of 2012, marking a dramatic slide in the fortunes of the country.

Other measures which the government announced include curbs on foreign travel and purchase of vehicles by government officials.

The government’s belt-tightening attempts last July by banning creation of new posts and foreign travel curbs had little impact on total spending.

($1 = 56.1250 Indian rupees)

Additional reporting by Manoj Kumar in New Delhi and Swati Bhat in Mumbai; editing by Malini Menon

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