India Budget Cuts Designed to Spur Foreign Investment

February 5, 2013 Posted by India Briefing Reading Time: 2 minutes

Feb. 5 – India’s Finance Minister, Mr. P. Chidambaram, has announced sweeping budget cuts across numerous sectors to preserve the country’s credit rating and to encourage foreign investment. In further demonstration that the Indian government is now getting serious about introducing more business-friendly policies, Chidambaram has cut spending budgets in welfare, defense and road projects to avoid a fiscal deficit figure by March, and to bring the economy under more prudent management.

The cuts will reduce public spending by some US$22 billion during 2013, equivalent to about 1 percent of GDP. A fall off in foreign direct investment over the past two years has been blamed in part on public spending funded through market borrowing that has crowded out the private sector.

Various Indian ministries and agencies are now bracing for reductions in their 2013-14 budgets by as much as 24 percent.

“Budget cut is inevitable given the grim fiscal position. We have to make do with what we get,” said the Union Rural Development Minister Jairam Ramesh.

Chidambaram’s aim is to reduce India’s fiscal deficit to under 5.3 percent of total GDP, a move that will give private investments more room to borrow and increase their confidence to invest. In conjunction with this, India has also implemented numerous policies and programs to increase investor confidence, including an FTA with ASEAN on services and investments, a recent interest rate cut, and the launch of India’s first government-to-business portal.

“The deficit will remain below 5.3 percent for 2013 and below 4.8 percent next year. I am not going to cross these red lines,” Chidambaram told Reuters.

India’s economy is set to expand by 5.6 percent in 2013, the lowest growth rate in the past 10 years, prompting the government to take long-term strategic measures to redress the issue. That said, India’s GDP growth rate is still among the highest in the world, yet remains stubbornly below the 8 percent needed to introduce more sweeping infrastructure investment and development reforms.

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