Amadeusz Juskowiak

Indian budget deficit seen fueling inflation

Prime Minister Rajiv Gandhis fiscal 198788 budget has sparked speculation that a large deficit will push up Indias moderate inflation rate and that the countrys stock markets will experience prolonged uncertainty economists politicians and stockbrokers told Reuters

The projected deficit for fiscal 198788 ending March is 5688 billion rupees down from an upwardly revised estimate of a record 8285 billion in fiscal 198687

The projected inflation rate for fiscal 198687 based on wholesale prices is 65 pct against 38 pct in 198586

Economists pointed out that the government itself had expressed concern about inflation in its most recent 198687 economic survey report published last week

Presenting the budget to parliament on Saturday Prime Minister Gandhi said a cabinet committee would be appointed to trim large nondevelopment expenditures The deficit for 198788 will not be allowed to exceed the budgeted figure he said

But few analysts have taken Gandhis assurance seriously They say the deficit more than doubled in 198687 from an initial estimate of 365 billion rupees

Lal Krishna Advani president of the opposition Bharatiya Janata party said Gandhis failure to mention specific measures to cut nondevelopment expenses will push up prices

Economists said increased liquidity in the economy as reflected by expansion of the M3 aggregate money supply may cause prices to rise The survey report showed the M3 rose by 157 pct or 18578 billion rupees in the first nine months of 198687 against 1337 pct or 13642 billion in the same 198586 period

Economists also said uncertain monsoon rain prospects after bad weather last year may strain prices further

Economists said the deficit would also cause the government to rely increasingly on internal borrowing Market loans and bonds were projected at 98150 billion rupees for 198788 up from the 198687 estimate of 85213 billion

No reduction has been proposed in personal income taxes which will discourage savings economists said

Avinash Purulkar chief manager of the stateowned Union Bank of India said the annual inflation rate may double to around 15 pct in 198788 as the government prints more currency notes to cover the deficit

Brokers said stock market investors have started selling longterm portfolios to take advantage of a proposal in the budget that reduces the holding period required to claim exemption from the capital gains tax to one year from three

Delhi stockbroker B D Aggarwal said There is uncertainty in the market There is going to be growing selling pressure

But Bombay broker Dinesh Walji said the present hectic selling of shares will slow when more buyers appear on the scene Just now there is acute nervousness in the market he said

Brokers said proposals to set up a mutual fund to help small investors buy equity shares and relaxations in the capital gains tax will inject further buoyancy into the market on a longterm basis

New equity and debenture issues both convertible and nonconvertible rose to an officially estimated 5070 billion rupees in AprilJanuary 198687 from an estimated 3695 billion in all 198586 and 20 billion in all 198485