India Budget Disappoints Investors

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Indian farmers, who are the country's primary voters, could use the help. They are sweltering through an abnormally hot summer: India's crucial monsoon rains are currently about 50% below requirements, raising the specter of increased malnourishment at a time when the urban economy has largely stalled as a result of the worldwide recession.

deficit will soar

All of the government's ambitious proposals to help the rural poor come with a heavy cost. Because tax collections have fallen during the slowdown, the government will now borrow an additional $93 billion this year, pushing the federal deficit to 6.8% of the country's $1.2 trillion GDP. For the past three quarters, India's government has been the primary driver of economic growth, using an $85 billion stimulus package to keep GDP growth at 7%. Without the increased government spending, India's economy would have grown only 0.1% in the last quarter of 2008, and only 2% in the first quarter of 2009.

Mukherjee hinted throughout his speech that he expected the economy to stabilize as the year goes on, though, saying that a return to the 9% growth rates of 2006 and 2007 would boost tax revenues, eventually allowing the government to reduce its deficit to about 4% by 2011. Before the budget, government officials had tried to lower expectations by saying the rising deficit made things difficult. "It's a close balancing act," says Aninda Mitra, a sovereign ratings analyst at Moody's. "It's clear that fiscal space was extremely constrained, and what little maneuverability that may have been there may not be consistent with long-term financial restraint."

Mukherjee may have more up his sleeve, said a senior Finance Ministry official, who asked not to be named since he was not authorized to speak to the media. The government could earn as much as $55 billion from selling its stake in several public sector companies that are the last vestige of the country's once centrally run economy. By delaying that decision, "he is keeping something for [a] rainy day," said the official. "Why would they sell that stake in such a confusing market?"

Srivastava reports for BusinessWeek from New Delhi.

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