MUMBAI (Bloomberg) -- India may raise its budget deficit estimate next month to as high as 6.5 percent of gross domestic product, the most in 19 years, as the government increases stimulus spending, Standard & Poor’s said.

The odds of a revision are already priced in the nation’s credit outlook, Takahira Ogawa, a Singapore-based director of sovereign ratings at S&P said in an interview. The Ministry of Finance said in February that the shortfall in the fiscal year ending March 31 would be 5.5 percent of GDP, compared with 6.2 percent last year and 3 percent for China in 2009.
Prime Minister Manmohan Singh, who won a second five-year term last month, is borrowing more to fund increased spending aimed at reviving Asia’s third-largest economy, forecast by the central bank to expand at the slowest pace in seven years. S&P and Moody’s have said India’s ratings may come under pressure if the government fails to rein in the budget gap.
“Fiscal risk in India is among the highest globally,” Ogawa said. “It’ll be difficult for the government to address this issue at least for another year. India is expected to raise this year’s deficit target by 0.5 to 1 percentage point.”
S&P, which rates India’s debt the lowest investment grade, cut its outlook to negative from stable before the April-May parliamentary elections, saying government spending to help shield the economy from the global recession and win voter support were “not sustainable.” Finance Minister Pranab Mukherjee is scheduled to present his budget on July 6.
Spending More
The budget shortfall may deepen as Singh spends more to fulfill election pledges of providing food at lower prices for the poor and developing the education and health sectors. The Reserve Bank of India has predicted the $1.2 trillion economy will expand 6 percent in the current fiscal year, compared with an average growth of 8.5 percent in the last five years.
India plans to sell a record 3.62 trillion rupees ($75 billion) of bonds in the 12 months to March 31. The combined budget deficit of the federal and state governments will climb above 11 percent of GDP this fiscal year, according to S&P.
Indian bonds are the worst performers this year among the 10 Asian local-currency debt markets outside Japan, with a 4.2 percent loss, according to indexes compiled by HSBC Holdings Plc. The benchmark 10-year bond yield has risen 1.68 percentage points this year, the biggest advance in at least a decade, to 6.93 percent, data compiled by Bloomberg show.
‘Higher priority’
Sustaining economic growth is a “higher priority at this moment” than sovereign ratings, India’s Finance Secretary Ashok Chawla said last month. India has asked the rating agencies to explain the rationale behind their recent warnings on ratings, according to Chawla.
India has unveiled three stimulus packages since December, lowering retail fuel prices, cutting taxes on consumer products and injecting capital into state-run banks, to shield the economy from the global crisis.
“India’s ability to control the deficit depends on how soon domestic demand will revive and the global crisis will ease,” Ogawa said.
Revenue from selling stakes in state-run companies and airwaves may help the government get the much needed funds and rely less on borrowing.
“The fiscal deficit would have been worse if not for higher revenues coming from selling airwaves and stakes in state-run companies,” said N. R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. “These additional revenues will help the government narrow the deficit but it will still remain very high this year.”
Photo: Prime Minister Manmohan Singh’s government may raise its budget deficit estimate in July to as high as 6.5 percent of gross domestic product.