Budget Day: Chidambaram faces moment of truth

Finance Minister P. Chidambaram will present one of the most highly anticipated budgets of recent years on Thursday, a blueprint for austerity that forms the centrepiece of India's efforts to stave off a damaging credit ratings downgrade.

The 2013/14 budget caps an intensive seven-month campaign by the energetic Chidambaram, who was appointed last August, to turn around the fortunes of Asia's third-largest economy after years of policy drift and global economic turmoil.

Chidambaram will likely spell out plans to narrow fiscal and current account deficits, which have alarmed ratings agencies and triggered warnings that the country's sovereign bonds could lose their investment grade status and be downgraded to 'junk' if urgent steps are not taken to rein in spending.

He is expected to announce plans to keep a lid on government spending in fiscal 2013/14, capping it at roughly the same level as the year ending next month, officials told Reuters, despite fears that lower public expenditure risks deepening India's sharpest economic downturn in a decade.

Economists say he may also unveil measures to widen the tax net to boost government revenues, lay the groundwork for a goods and services tax, reduce the government's huge subsidies bill, sell more stakes in state-owned enterprises and raise import duties to dampen demand for gold.

Investors will watch closely to see whether the three-times finance minister - seen as a possible candidate for prime minister in 2014 - will fulfill his promise of fiscal prudence or sow the budget with vote-winning, but expensive, welfare handouts.

"Fiscal consolidation is the need of the hour, and ratings agencies will sift through the finer budget details to judge India's sovereign credit rating, which already has a negative outlook at two ratings agencies," investment bank Nomura said.

When Chidambaram stands up in parliament at 11 a.m. IST to lay out the government's spending and fund-raising priorities for the coming year, he will effectively start the countdown to an election due by May 2014.

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