India's government may borrow more in the next fiscal year than budgeted to provide for potential benefits and pay increases for civil servants, Finance Minister Palaniappan Chidambaram said today.
The additional revenue will help meet any possible gains in salaries, Chidambaram said in an interview in New Delhi. ( Bloomberg )
The government aims to raise 1.45 trillion rupees ($36.3 billion), 7 percent less than in the current year, he said on Feb. 29, when presenting the budget proposals for the year starting April 1. Economists and traders in a Bloomberg News survey expected the amount to rise 7 percent next fiscal year.
``We can definitely expect to see the government borrow more in the next fiscal than it has indicated in the budget due to the expected salary increases,'' said N.R. Bhanumurthy, an economist at New Delhi-based Institute of Economic Growth. ``That may widen the government's budget deficit.''
The country's pay commission is scheduled to submit its report on government salaries in April. Salary increases following the last pay commission's recommendations in January 1997 cost the exchequer 170 billion rupees annually, the government said in 2006.
Chidambaram in his budget speech announced plans to cut taxes and waive farm loans worth as much 600 billion rupees before federal elections due by May 2009 and boost an economy facing the sharpest global slowdown since 2001.
The ``increase in salaries and the budget plans will leave more money in the hands of citizens, boosting production,'' Bhanumurthy said. ``It will help further accelerate growth.''
India's $906 billion economy is expected to grow 8.7 percent in the year to March 31, the slowest pace in three years. Still, growth will have averaged 9.2 percent since April 2006, the quickest rate since independence in 1947 and behind only China among the world's major economies.
The growth is attracting foreign companies to make record investments in India's shares and bonds, resulting in the fastest appreciation of the local currency against the dollar in at least 34 years.
``I don't know if it will appreciate'' further, Chidambaram said. ``But, even if it appreciates, I don't think it will appreciate as sharply as in 2007.''
The rupee appreciated 12.73 percent in 2007, the most in at least 34 years. Global investors bought a record $19.5 billion of stocks and bonds in 2007. They bought a net $8.9 billion of equities and debt in 2006 and $9.46 billion in 2005.
India has imposed controls to slow the inflow of money to curb the rupee's gain against the dollar and rein in inflation.
``We have to be prepared for any eventuality and respond as the situation demands,'' Chidambaram said. ``The government and the Reserve Bank of India together will take such temporary measures as may be necessary to moderate capital flows. Any measure will be a temporary measure.''
India's inflation accelerated to an eight-month high in the week ended Feb. 16 after the government raised retail prices of gasoline and diesel for the first time in more than 1 1/2 years.
``The rise in inflation is the reflection of the increase in diesel and petrol prices,'' Chidambaram said. ``It's still within the range predicted by the Reserve Bank of India. But, certainly, it's a cause for worry and we must ensure that inflation remains contained.''
Chidambaram said separately today that the Reserve Bank of India has declined to give so-called ``statutory liquidity ratio'' status for bonds to be issued to refining companies as partial compensation for selling fuel below cost.
India's Oil Ministry wants oil bonds to be included in a list of approved securities in which banks must invest to cover deposits. The central bank requires banks to hold 25 percent of their deposits in approved securities, such as government debt.
India compensates part of refiners' losses by giving them bonds.