Finance minister P Chidambaram is putting welfare, defence and road projects on the chopping block in a last-ditch attempt to hit a tough fiscal deficit target by March, risking short-term economic growth and angering Cabinet colleagues.
The cuts will reduce spending by about R1.1 lakh crore in the current financial year, some 8% of budgeted outlay, or roughly 1% of estimated gross domestic product, two senior finance ministry officials and a senior government adviser said.
It is the first time the scale of the cuts and details of where the axe will fall have been made public, with officials revealing startling details about delays to arms purchases and belt-tightening for politically sensitive rural welfare schemes in an election year.
Chidambaram has staked his reputation on lowering the deficit to 5.3% of GDP to improve the investment climate following ratings agency threats to downgrade India’s sovereign debt to junk if action was not taken.
After a series of investor-friendly reforms and small steps to reduce fuel subsidies, the finance minister has now turned firepower on big-spending colleagues, some of whom are pushing back, worried cuts will hit voters ahead of the national election in early 2014.
“Every ministry is affected by the budget cuts. We are trying hard to get as much money as possible,” said a senior official in the road transport ministry, who declined to be named because of the sensitivity of the issue.
A drop-off in investment, hurting growth, is blamed in part on public spending that is funded through market borrowing, crowding out the private sector.
Policymakers say getting India's finances in order will give private players room to borrow and the confidence to invest.
“With fiscal discipline, what will happen is that there will be larger money with the private sector, which can be used for the growth,” said BK Chaturvedi, who as Planning Commission member advises the government on infrastructure spending.
Chidambaram will officially report the revised spending figures for 2012-13 when he presents next year's Budget on February 28.
“It is I who have done the math, the deficit will remain below 5.3% this year, next year it will be below 4.8%. I am not going to cross these red lines,” Chidambaram said in an interview on London on Tuesday.
His attention has turned to spending because revenue has dropped. The economy is on track to grow about 5.6% this year, the lowest rate for a decade, and the government is struggling to raise