By Rajesh Kumar Singh and Arup Roychoudhury
NEW DELHI, Nov 16 (Reuters) - India will struggle to meet
its already swollen deficit target this year after a dismal
response to this week's auction of mobile phone licences and a
battle to sell stakes in state companies, Indian finance
ministry officials privately concede.
Global rating agencies have threatened to downgrade India's
sovereign credit rating to junk if it fails to put its fiscal
house in order. Analysts said while the disappointing auction
would likely not be a deciding factor, it underscored the
challenges facing the government in trying to slash the deficit.
Just last month, subdued tax revenue and higher spending on
subsidies forced the government to revise its fiscal deficit
target to 5.3 percent of gross domestic product (GDP) for the
current financial year from a previous target of 5.1 percent.
In setting the new target, the government was banking
heavily on generating billions of dollars from the auction of
second-generation (2G) mobile phone licences. But the auction
this week yielded just under 25 percent of the targeted 400
billion rupees ($7.3 billion), a result that caught officials
Finance Minister P. Chidambaram declined on Thursday to
answer questions about the disappointing auction, but his
officials said it may have pushed the government's already tough
deficit target even further out of reach.
"The task has become more difficult. Some out-of-the-box
measures are needed to save the situation," a senior finance
ministry official with direct knowledge of the matter told
Other finance ministry officials interviewed by Reuters this
week gave similar assessments. The officials declined to be
identified as they are not authorised to speak to the media.
Seven private economists polled by Reuters said they now
expected the fiscal deficit for the year to end-March 2013 to
slip to 5.5-6 percent of GDP.
"Slippage is now inevitable. How much slippage happens
depends on whether they can actually cut down on any spending
area," said Sonal Verma, an economist at Nomura.
FISCAL CREDIBILITY AT STAKE
The government still holds some tools to get it closer to
its fiscal goal. It has an option to sell its stakes in private
firms such as Axis Bank, infrastructure company Larsen
and Toubro and hotel and tobacco conglomerate ITC
. It can also ask for special dividends from cash-rich
Besides selling still-unsold telecom spectrum, it could even
consider liquidating its land holdings, finance ministry
But the officials said it was unclear just how much revenue
this would all generate and whether it would be enough to meet
the 5.3 percent fiscal target.
Last year, the fiscal deficit overshot the target of 4.6
percent by 1.2 percentage points. Another big slippage this year
could further erode the nation's fiscal credibility.
"It is not business as usual. Everybody is under pressure to
meet the (deficit) target," said a finance ministry official.
"Time is running out."
The government's battle to mend its finances not only
undermines the battle against high inflation, but it also lowers
growth prospects as funding the deficit from domestic savings
crowds out private investment.
The government is on track to borrow 5.7 trillion rupees,
5.6 percent of GDP, by February. Every 0.1 percentage point
increase in the deficit is estimated to result in an additional
market borrowing of at least 100 billion rupees.
The response to the 2G auction was in sharp contrast with
the 2010 sale of faster third-generation licences, which fetched
the government more than $12 billion and helped contain the
deficit that year at 4.7 percent.
"We were over-optimistic," a senior economic adviser at the
Chidambaram pledged last month to nearly halve the fiscal
deficit by March 2017. But the plan he presented was short on
specifics and was panned by economists.
($1=54.70 Indian rupees)
(Additional reporting by Annie Banerji; Editing by Ross Colvin
and Jacqueline Wong)