[Reuters]

Published date: 16th Sep 1997

16 September 1997

Reuters News

English

(c) 1997 Reuters Limited

NEW DELHI, Sept 16 (Reuter) – India’s government, clearly alarmed by a fiscal deficit that was threatening to soar out of control, moved on Tuesday to boost revenues with a host of steps including a jump in import tariffs and a cut in federal spending.

The pre-emptive steps included a three percent hike in duties on all imports except petroleum and project components; a five percent cut in both expenditure outlined in the 1996-97 federal budget; a doubling of travel taxes on individuals; and a speeding up of plans to divest stakes in five major state firms.

A government spokesman said the package was expected to yield additional revenue totalling 68.8 billion rupees ($1.9 billion).

The measures were unveiled five days after the government was forced to agree to a humiliating second wage increase for 5.3 million restive government employees after an initial bout of pay rises in July.

“The government gave away 70 billion rupees to its employees. This is to offset that. The two figures come pretty close to each other,” said Suresh Tendulkar, a professor at the Delhi School of Economics (DSE).

At issue was the stated aim of reining in the fiscal deficit to 4.5 percent of gross domestic product (GDP) in 1997/98 (April-March) — a goal that economists doubt will be achieved.

Finance Minister P. Chidambaram said last week higher than expected government spending could jeopardise the deficit target and that the 1996/97 deficit was likely to come in at 5.1 percent of GDP against an earlier estimate of 5.0 percent.

A week ago the International Monetary Fund (IMF) in its annual report warned India to aim for an accelerated reduction in its fiscal deficit, saying a delay in fiscal adjustment would leave the economy vulnerable to external developments.

Economists polled by Reuters last week predicted the fiscal deficit would range between 5.2 and 6.0 percent of GDP this year.

1. Krishnamurthy of Delhi University’s Institute Of Economic Growth agreed with Tendulkar that the wage increase for government employees had triggered the latest spending cuts. But he termed the decision to hike customs duties as a retrograde step.

“Increasing customs duty will be a reversal of earlier policy,” Krishnamurthy told Reuters.

Mark McFarland, an economist at Peregrine Brokerage Ltd in Hong Kong, predicted last week that the fiscal deficit would be nearer 6.0 percent in 1997/98 and cited lower revenues from tax and import duties as contributory factors.

A briefing paper prepared for a meeting a week ago between Prime Minister Inder Kumar Gujral and prominent economists warned of a deceleration in export growth and added:

“On the import front, growth in U.S. dollar terms declined from 28 percent in 1995/96 to 5.1 percent in 1996/97. This could be a reflection of slackening demand in the economy for investment goods, Intermediates and raw materials.”

Krishnamurthy said the government was clearly acting on the IMF’s advice. “It looks like before going to the Fund-World Bank meeting, this is to stem the tide of pressure from the IMF on the fiscal deficit,” he added.

The IMF and the World Bank are scheduled to hold their annual meetings in Hong Kong next week.

But the DSE’s Tendulkar said the cut in non-plan expenditure was likely to adversely affect the maintenance of existing assets.

“A cut in plan expenditure would affect public investments but it would depend on whether they are cutting investment in infrastructure or somewhere else where private investment would be more productive. It depends where it is cut,” Tendulkar said.

(c) Reuters Limited 1997