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January 30, 2001
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India faces uphill task with budget after quake

Indian Finance Minister Yashwant Sinha, who was already facing limited options for the budget he is due to present next month, finds himself further constrained after the devastating earthquake in Gujarat, analysts say.

While no official estimates are yet available on the cost of last week's quake or how it will be funded, analysts fear that a large part of the expenditure may have to be borne by the cash-strapped Union government.

This effectively rules out a soft budget to stimulate flagging economic growth, they say. Most independent forecasts expect the economy, among the world's fastest-growing in the past decade, to grow by about 6 per cent in the current fiscal year, down from the estimated 6.4 per cent in 1999-2000.

The budget for the financial year beginning April 1 will be presented to Parliament on February 28.

Domestic media have already speculated that the government will impose an additional tax to meet the costs of rebuilding the economy of India's second most industrialised state.

"All that appears certain at the moment is that it will constrain the budget making exercise," said Indranil Pan, economist at Credit Rating Information Services of India Ltd.

"At the moment, there are no clear estimates on the cost of the damage and it's all guesswork," he said.

Sinha said on Monday that the effects of the earthquake were likely to be felt on future budgets, noting that repairing damaged houses and putting destroyed businesses back on their feet could hardly be completed by the end of March.

"It will naturally spill over," he told reporters.

On Sunday Sinha said the damage would have an impact on the economy, which is already slowing, and that the cost of reconstruction would be "enormous".

He said India was seeking $1.0 billion in assistance from the World Bank, which said it will release $300 million for emergency relief work, and $500 million from the Asian Development Bank.

Fiscal deficit to take hit

Analysts said the most likely budgetary fallout from the quake would be for the fiscal deficit to overshoot the targeted 5.1 per cent of GDP for the current year.

"Even if it is by a small amount, the fiscal deficit will certainly exceed its target for this year," said an economist at a leading European securities firm.

"It depends on the break-up of the cost between the federal and state governments, multilateral agencies and central bank monetisation," he said.

A higher fiscal deficit would in turn affect budget projections for the next year, the economist said.

"The other factor that needs to be considered is the impact on revenue collections," he said.

Gujarat is a prosperous state which contributes significantly to the federal revenues through tax and excise duty collections.

Customs collections from shipments through Gujarat's Kandla port, India's busiest, are also significant contributors to the federal coffers.

"One positive is that so far all the leading industries in Gujarat have reported little or no damage from the quake so maybe production and revenue will not be hit much," the economist said.

Friday's quake, India's worst ever, has mainly damaged residential buildings, according to companies and officials in Gujarat. It is feared to have killed up to 100,000 people.

Neither the federal nor the state government has put a figure on the cost of the damage, although a leading industry body estimated it could be Rs 150 billion.

Some media reports have put the figure higher -- at Rs 200-250 billion.

Analysts say a large part of this figure may have to be met through fresh government borrowings, driving up the fiscal deficit as happened last year.

In 1999-2000, the fiscal deficit ended at 5.6 per cent of GDP, driven above an initial target of 4.1 by spending on reconstruction in cyclone-ravaged Orissa and costs caused by a mini-war with Pakistan over disputed territory in Kashmir.

However, analysts and traders do not expect sharp rises in interest rates, the normal outcome of heavy government borrowings, as the outlook is currently positive and the central bank has enough leeway to inject liquidity through cuts in banks' cash reserve ratio.


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Earthquake News: Comprehensive news, information and features

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