Finance Minister P Chidambaram may have to slice at least Rs 200 billion from government spending to prevent a budget blow-out, which could threaten to send the country's credit rating into "junk" status, two ministry officials said.
P Chidambaram will make a final decision on whether to go ahead with the cuts at the end of October, when he gets an update on revenue collections, the officials, who have direct knowledge of the process, said.
If he goes ahead with cuts, the minister would likely focus on areas of discretionary spending but keep programmes, such as food subsidies, in place as Assembly and Lok Sabha elections near, these officials said.
P Chidambaram, who last year oversaw cuts worth over 1 trillion rupees, is aiming to prevent the budget for the fiscal year to March 2014 from stretching beyond a deficit target of 4.8 percent of GDP.
A budget blow-out would be a concern for credit ratings agencies. India has the lowest investment grade rating and Standard & Poor's maintains a negative outlook. A cut to "junk" status would raise its borrowing costs and could trigger further panic on financial markets after the rupee fell as much as 20 percent this year and the economy posted its weakest growth in years.
The officials said that P Chidambaram had briefed government officials on September 17 on the need for prudent spending, even though in public he has said that the budget remains on target.
"With oil subsidies up by about 300 billion rupees, the government may have to cut expenditure by around 200 billion rupees in addition to usual savings of around 300 billion rupees at the end of the year," said a senior finance ministry official.
Doubts that economic growth and tax receipts will match budget assumptions, and slow government asset sales also pointed to the need for spending cuts, the officials said.
However, a spokesman for the ministry said there were no plans for cuts at present and that "departments have been instructed to manage within the allocated funds".
EYE ON ELECTIONS
Fearing defeat in state elections likely due in November and in national polls due by May next year, the government has balked at cutting its hefty oil subsidy bill and recently introduced a costly food subsidy scheme targetted at the rural poor