India to opt for prudence over populism in budget

India's finance minister presents his annual budget Thursday that is expected to see him opt for austerity over free-spending populism despite elections due early next year and a sharply slowing economy.

Finance Minister P. Chidambaram, presenting the eighth budget of his career, has pledged a "responsible" budget and voiced eagerness to restore confidence in India's public finances and economic management by tightening spending.

The Harvard-educated lawyer, who has a reputation as a committed pro-market reformer, will present "an austere budget" in a bid to bring Asia's third-largest economy back on track, said Nomura economist Sonal Varma.

"We expect the government to announce some populist schemes -- but all within the limits of fiscal prudence," Varma said, predicting lower spending growth and public asset sales.

The veteran minister in the Congress government has been attempting a course correction since being reappointed to the finance portfolio in mid-2012 when his leftist and widely criticised predecessor Pranab Mukherjee was elected president.

He has introduced a string of reforms -- opening India to wider foreign investment and cutting deficit-ballooning spending and subsidies -- to avert a damaging credit rating downgrade.

He is presenting his budget amid a gloomy backdrop, with the economy projected to expand by 5.0 percent this fiscal year to March -- marking a decade low -- and far under the 7.6 percent growth projected in last year's budget.

Figures for the October-December quarter are also set to be released on Thursday, providing a snapshot into the health of the once-booming economy which has been hit by a dramatic fall in investment and high interest rates.

An official forecast on the budget's eve was more upbeat for the 2013/14 fiscal year, saying growth would reach 6.1-6.7 percent next year.

"The economy is looking up," concluded the report, while saying the government must keep up reforms to reignite investor confidence.

Investors have given a wide berth to India -- deterred by corruption scandals, suffocating red tape, high inflation, sharply slowing growth and the deteriorating government finances.

"The slowdown is a wake-up call for increasing the pace of actions and reforms," said finance ministry chief economic advisor Raghuram Rajan.

"These are difficult times but India has navigated such times before and with good policies it will come through stronger."

Chidambaram has called the government's fiscal deficit targets of 5.3 percent of gross domestic product for this year and 4.8 percent next year "red lines" that cannot be breached.

Cuts are expected to hit defence spending as well as the important rural development ministry, which has the second-largest budget after the military.

But economists say the real test will be in the run-up to national elections due in the first half of next year when politicians from the struggling ruling Congress party are likely to clamour for him to open the purse strings.

"Fiscal contraction in the run-up to an election is hardly a recipe for electoral success," noted CLSA economist Rajeev Malik.

Chidambaram is likely to tap the public finances for one major populist measure -- the government's long-promised food security bill targeting the poor masses that Congress hopes will turn around its sagging electoral fortunes.

The bill says cheaper grain will be supplied to up to 75 percent of the population in rural areas and up to 50 percent of the population in urban areas.

The government will showcase the act as one of its "key achievements in a bid to woo the electorate ahead of the election", said Nomura's Varma.