India says meeting deficit target 'major challenge'

The South Asian economy faces a difficult few months ahead, says Mukherjee.

NEW DELHI: Meeting India's fiscal deficit target will be a "major challenge," Finance Minister Pranab Mukherjee admitted Wednesday, adding that the South Asian economy faced a difficult few months ahead.

Economists have forecast India may miss its goal of reducing its budget gap to 4.6 percent of gross domestic product by one to two percentage points in the current fiscal year to March as growth loses steam and subsidies swell.

"Adhering to the fiscal deficit target of 4.6 percent of GDP (gross domestic product) in 2011-12 is a major challenge," Mukherjee told a business audience, adding India had "a difficult last quarter ahead of us in this fiscal year."

The gap between India's spending and revenues stood at 6.7 percent of GDP in the first half of 2011-12 and has emerged as a central concern of economists who say it could be between six or seven percent for this financial year.

The deficit problem has been worsened by a sharp shrinkage in growth of tax revenues and the cost of government payments to cover the revenue losses of state-owned oil retailers for selling products at state-set cheaper prices.

The fiscal deficit stood at 4.7 percent a year ago.

In another setback, the government has also raised just three percent of its goal of collecting 400 billion rupees ($7.9 billion) from sale of holdings in state-owned firms this financial year, according to official figures.

Prices of India's benchmark 10-year bonds have been falling on concern that the government will miss its fiscal target, resulting in higher borrowing costs.

India has already raised its debt sales target to a record 5.1 trillion rupees to meet the cost of higher subsidy payments and other expenses.

While the rupee has firmed from record lows against the dollar in recent weeks, Mukherjee said the currency would remain under pressure until there is a "durable solution to the sovereign debt problem in Europe."

The rupee was Asia's worse performing currency in Asia last year as investors fled developing markets to pump money into US assets such as treasury bills -- seen as safe bets in times of crisis.

Mukherjee said he expected the economy to grow by around "seven and a half percent or a little less" this year after expanding 8.5 percent in 2010-11.

But some economists have said growth could be below seven percent.