Deficit fears shake India story as welfare spending increases

India's economy may not have melted down with the rest of the world in 2008, but it's starting to look less and less like we dodged the bullet. 

Even as the first signs of a thaw in political gridlock emerge, there are troubling signals that runaway social spending — however well intentioned — may result in a disastrous budget deficit.

The pain is already being felt, P. Vaidyanathan Iyer writes in the Indian Express.  The Sensex has plunged 25 percent this year, while the broader BSE-500 has plummeted nearly 40 percent.  The finance minister has already conceded that he'll miss the fiscal deficit target by at least a percentage point this year, and the slowest economic growth in two years means tax collections, too, will see a drop.

In that context, this week, India aims to push through a massive program to provide subsidized food to some two-thirds of the population, which some experts estimate will cost the treasury as much as $20 billion.  It's a wonderful idea, and it may indeed pay dividends in increased worker productivity, an overhaul of the distribution system, and a stimulus to the economy at the bottom-end — where money immediately translates into consumption.  But analysts have one little concern: How will India pay for it?

Nor is a ballooning deficit India's only concern:

A sharply depreciating rupee that can touch 60 to a dollar, continuing policy flux, populist measures ahead of state elections, a deteriorating eurozone with substantial exposure to India, and a simmering liquidity crisis, are akin to concentric dark circles around the fiscal cloud. On top of all this, there are demands to cut interest rates at a time when inflationary pressures are nowhere near the comfort zone. Surely, crisis managers will not come to the fore only when the crisis blows up in their face.