Cash subsidies will help cut spending: Chidambaram

India will rein in government spending and achieve this partly by switching to a system that delivers subsidies by direct cash transfers instead of discounts, finance minister Palaniappan Chidambaram said in an interview published today.

Talking to the Wall Street Journal, Chidambaram also said that he "will be happy" if India can post a budget deficit for the fiscal year ending 31 March 2013 close to the budgeted target of 5.1 per cent of gross domestic product. "With some luck, we could aim at 5.3 per cent or so," he said.

Economists warn that a soaring deficit would crowd out private investment, stoking inflation and potentially precipitating downgrades of the country's sovereign debt by rating firms.

Chidambaram said India's deteriorating macroeconomic environment, which is marked by an investment slowdown, widening fiscal and current-account deficits, stubborn inflation and a sinking currency, forced him to push for previously stalled reforms.

He was particularly concerned about the rupee's sharp decline. "Could we have waited until the day when the rupee had touched 60 to a dollar?" he asked. "The answer is obviously no." The Indian currency has regained some ground in recent weeks, and was trading at 52.2 to the dollar on Monday.

Also, ratings firms have said they are considering downgrading India's sovereign debt to junk status. "We believe that India doesn't deserve a downgrade, but we take such talk seriously," he said.