India cuts growth forecast, warns on trade balance, deficit

NEW DELHI: India slashed its full-year growth forecast on Friday amid
slowing domestic and global demand, with officials warning the
government was facing a serious balance of trade problem and will have a
tough time meeting its fiscal deficit target.

Asia's third-largest economy is now expected to grow by 7.25 to 7.75
percent in the fiscal year ending next March, the government said in a
mid-year review, down sharply from an estimate of 9 percent issued in
February.

The slowing economy has put government finances under further stress,
fueling a recent sell-off in the rupee. While tax receipts so far have
lagged the budgeted estimates, expenditures are climbing at a faster
clip.

"There can be no denial that meeting the target (of fiscal deficit)
will not be easy this year," the finance ministry said in its review,
without giving a revised forecast.

Separately, the trade deficit for the fiscal year ending March 2012
is expected to sharply widen to $155-$160 billion from $104.4 billion a
year ago, posing further downside risks to the weak Indian currency.

Slowing demand for Indian merchandise in overseas market is also
making the government uncertain about achieving its annual export target
of $300 billion.

"There is clear evidence of a deceleration in exports growth," said
Rahul Khullar, trade secretary, after releasing the provisional trade
data for November.

"There is a serious balance of trade problem."

Net tax revenues have grown at just 7.3 percent year on year in the
first seven months of 2011/12, while expenditure has jumped by about an
annual 10 percent.

Adding to the gloomy outlook, the government said raising a budgeted
400 billion Indian rupees ($7.7 billion) via stake sales in state-run
companies in choppy market conditions would be hard to achieve.

"There can be no denial that meeting the target (of fiscal deficit)
will not be easy this year," the finance ministry said in its review,
without giving a revised forecast.

With less than four months of 2011/12 still remaining, economists say
the full-year fiscal gap may be almost one percentage point higher than
the budgeted target of 4.6 percent of GDP.

The fiscal deficit has already reached nearly 74 percent of the full-year target.

Any slippage on the fiscal front is expected to force the
cash-strapped government to borrow more from the market. It has already
unveiled 528 billion rupees of extra borrowing for the remainder of this
year.

The government blamed its rising subsidy bill for higher expenditures
but said it is determined to keep any slippage in the fiscal deficit
target to a minimum level.

Early this week, the government forecast its subsidy bill for the full year to rise by 1 trillion rupees.

HEADWINDS

India may face its worst financial crisis in decades if it fails to
stem the slide in the rupee, leaving the central bank with a difficult
choice over how to make best use of its limited reserves to maintain the
confidence of foreign investors.

Unlike most of its Asian peers, India has recently been running large
current account and fiscal deficits. That means it must attract
sufficient foreign money -- namely U.S. dollars -- to close the gap, and
a weaker home currency makes that costlier.

Europe's festering debt crisis and worries about the U.S. economy
have seen global investors pull funds from emerging markets in recent
months, adding to pressure on their currencies.

The rupee is facing the brunt of this capital flight. The partially
convertible currency is down nearly 17 percent against the U.S. dollar
this year and is the worst performer in Asia.

The government has attributed the depreciation in rupee in part to
global reallocation of funds toward safe-haven assets and has reiterated
its policy of forex intervention to control volatility rather than
alter the trend.

The weak rupee is confounding India's inflation management by pushing
up the cost imported items. Headline inflation has been steadfast above
9 percent for the past 11 months despite 13 rate hikes by the central
bank since March 2010.

The government said softening global commodity prices on slowing
demand should cool inflation beginning December and slow it further to 7
percent by March. - Reuters