INDIAN BUDGET DEFICIT SEEN FUELING INFLATION
Prime Minister Rajiv Gandhi's fiscal
1987/88 budget has sparked speculation that a large deficit
will push up India's moderate inflation rate and that the
country's stock markets will experience prolonged uncertainty,
economists, politicians and stockbrokers told Reuters.
    The projected deficit for fiscal 1987/88, ending March, is
56.88 billion rupees, down from an upwardly revised estimate of
a record 82.85 billion in fiscal 1986/87.
    The projected inflation rate for fiscal 1986/87, based on
wholesale prices, is 6.5 pct against 3.8 pct in 1985/86.
    Economists pointed out that the government itself had
expressed concern about inflation in its most recent 1986/87
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 non-development expenditures. The deficit for
1987/88 will not be allowed to exceed the budgeted figure, he
said.
    But few analysts have taken Gandhi's assurance seriously.
They say the deficit more than doubled in 1986/87 from an
initial estimate of 36.5 billion rupees.
    Lal Krishna Advani, president of the opposition Bharatiya
Janata party, said Gandhi's failure to mention specific
measures to cut non-development 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
15.7 pct or 185.78 billion rupees in the first nine months of
1986/87 against 13.37 pct or 136.42 billion in the same 1985/86
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 981.50 billion rupees for 1987/88, up
from the 1986/87 estimate of 852.13 billion.
    No reduction has been proposed in personal income taxes,
which will discourage savings, economists said.
    Avinash Purulkar, chief manager of the state-owned Union
Bank of India, said the annual inflation rate may double to
around 15 pct in 1987/88 as the government prints more currency
notes to cover the deficit.
    Brokers said stock market investors have started selling
long-term 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 long-term basis.
    New equity and debenture issues, both convertible and
non-convertible, rose to an officially estimated 50.70 billion
rupees in April/January 1986/87 from an estimated 36.95 billion
in all 1985/86 and 20 billion in all 1984/85.
 REUTER
