India’s increased spending will inflate budget deficit to 6.8 percent of GDP, worrying markets

To spur growth, India sees budget deficit growing

MUMBAI, India — Aiming to revive economic growth, India’s government said Monday increased spending in its new budget would inflate the fiscal deficit to 6.8 percent of the country’s gross domestic product.

Stocks plunged on concerns about a ballooning budget deficit and disappoinment that Finance Minister Pranab Mukherjee stopped short of annoucing any new liberalization measures.

Hoping to create jobs and spur growth, the government will boost total spending 36 percent to 10.3 trillion rupees ($214 billion) for the year that ends March 2010, Mukherjee said in presenting the budget to Parliament. It surpassed the 10 trillion rupee mark for the first time since India’s independence in 1947.

“The first challenge is to lead the economy back to a high growth rate of 9 percent per annum at the earliest,” he said. Economic growth for the year through March slowed to 6.7 percent.

Mukherjee said he aimed to increase infrastructure spending to 9 percent of gross domestic product by 2014, boost defense spending, provide credit to troubled exporters and simplify the tax code.

Spending on a rural employment program that last year provided jobs to 44.7 million poor households would go up 144 percent to about $8 billion, he said. Government food subsidies for the poor and farmer loan relief programs would also be extended.

“Aam aadmi” — the “common man” in Hindi — “is now the focus of all our programs and schemes,” he said.

Investors, however, worried about India’s bulging fiscal deficit. The benchmark Sensex index tumbled more than 750 points, or 5 percent, to 14,154.57 in afternoon trading.

India’s deficit has grown since the government enacted three fiscal stimulus packages of tax cuts and spending totaling 3.5 percent of GDP, on top of deep spending on fuel subsidies, government pay hikes, and farmer loan and employment programs.

That has caused credit rating companies to threaten downgrades.

Taking into account state deficits and off-balance sheet items, the total deficit is far higher, analysts say. Goldman Sachs puts the consolidated fiscal deficit at 10.1 percent of gross domestic product for this fiscal year.