Exclusive: India must tackle higher subsidy spending soon - finance minister

Reuters

By Manoj Kumar and Frank Jack Daniel

NEW DELHI (Reuters) - India must tackle a jump in spending on fuel and food subsidies sooner rather than later, Finance Minister P. Chidambaram said, part of a series of steps aimed at stabilising the economy to be announced ahead of an election due within seven months.

Asia's third largest economy is suffering its longest and deepest slump in at least a decade. Rating agencies have threatened to downgrade its sovereign debt to "junk" status, and the government is racing to revive growth in a bid to return to power for a third consecutive time.

"We've done a lot of things, but we have to do many more things, and I think we will do them in the next few weeks and months, both by the government and by the central bank," Chidambaram told Reuters in an interview on Monday.

India imports nearly 80 percent of its oil needs and a sharp decline in the rupee's value since May has made government fuel subsidies more costly.

"On the government side, sooner (rather) than later we will have to address the issue of higher subsidies than budgeted, on both fuel and food," he said, on the eve of a week-long trip to the United States that includes an investor roadshow in San Francisco.

Last month, the government deferred a plan to raise diesel prices by close to 10 percent to offset the damage caused by the weaker rupee. Oil subsidies are now estimated at more than 900 billion rupees for the current fiscal year - nearly 40 percent more than budgeted.

Chidambaram, who is trying to win back investor confidence in large part by reducing a wide fiscal deficit, said India's slowdown would impact revenues and indicated he could rein in spending by some large government departments despite the looming national election.

"Not as much as last year, people say last year was pretty brutal," said Chidambaram, who last year slashed more than 1 trillion rupees from budgeted spending to beat a tough fiscal deficit target.

While the finance minister is unlikely to announce wide spending cuts, he said he would rigidly enforce rules that make it hard for ministries to fully utilise designated funds.

Chidambaram said other steps to be taken could include the unwinding of measures the Reserve Bank of India introduced in July to control a rapid depreciation of the rupee. The central bank's measures, which included tightening liquidity, have been criticised for dampening growth.

The rupee lost as much as 20 percent against the dollar in a rout triggered by fears the U.S. Federal Reserve would rapidly roll back its quantitative easing programme. The rupee has since recovered some ground and Chidambaram said steps taken by India to attract capital inflows would offset much of the impact when the expected "tapering" begins.

"I think the market has factored the taper more or less entirely," he said. "We acknowledge that the taper will happen, there will be some impact."

Rising exports, dollars sent home by Indians abroad and looser rules on allowing foreign investment would drive stronger inflows, Chidambaram said. "We should be able to withstand any small impact as a result of tapering." (Editing by Alex Richardson)

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