The finance ministry is taking the knife to spending to ensure that the fiscal deficit 'red line' is not breached, as tax revenues look to be falling short of target and other receipts risk coming in below expectation while subsidies mount.

North Block hopes the squeeze will not be as severe as last year and a small cut will be adequate. Overall spending was slashed by more than 80,000 crore last year to stay within the budgeted fiscal deficit as ratings agencies threatened to downgrade India.

Finance minister P Chidambaram has repeatedly said that the budgeted fiscal deficit of 4.8% of gross domestic product is a "red line" that will not be crossed, and his ministry has got down to the business of ensuring that.

Ministry officials are worried tax revenue could fall short and subsidies will rise, but have not yet given up on disinvestment that is budgeted to fetch 54,000 crore in the fiscal, including 14,000 crore from the sale of residual stakes in privatised companies such as Hindustan Zinc and Balco. Only 1,323 crore of the target has been met so far.

"There will be some cut in expenditure but not as sharp as last fiscal," said a senior finance ministry official though he did not put a number to it. He said the fiscal deficit target would be met.

This means that the government is unlikely to fall into the trap of profligacy ahead of elections next year as any fiscal slippage is unlikely to go down well with rating agencies.

The finance ministry official said the backlog of funds from the previous year will allow the ministry to make the reduction less severe than the last financial year.

The sale of residual stakes in Hindustan Zinc and Balco is expected to move forward soon with the cabinet note being circulated over the next two weeks.

The two are expected to fetch the government as much as 20,000 crore, which ministry officials feel could help the government get closer to the target.

A higher dividend from state-owned companies and the Reserve Bank of India will also provide some succour to the revenue-generation drive, which is expected to pick up pace after December.

The government also has the fallback option of divesting the stake held by the Specified Undertaking of Unit Trust of India (SUUTI) in private sector companies.

Therefore, as of now, the ministry is looking to cover only the slippage in tax revenue that is likely given the ambitious 19% growth budgeted as the economy struggles with sub-5% growth.

However, the recent pickup in direct tax collections has given the ministry hope that the slippage could be contained to around Rs 30,000 crore.

At the end of September, the growth in gross direct tax collections was 10.7%, which recovered by almost a percentage point to 11.6% by October.

The ministry has already issued a diktat to ministries and departments for a mandatory 10% cut in non-plan spending and is now looking closely at plan expenses as it prepares revised estimates to be presented as part of the government's annual accounts.

Some of the non-plan spending, essentially subsidies, will also get deferred to the next financial year, as is usually the case.

Independent analysts feel the government may have to apply a similar squeeze like the one last year if it is to stay within the budgeted fiscal deficit "We estimate a 22% cut in expenditure to allow the government to meet the 4.8% fiscal deficit target, said Abheek Barua, chief economist, HDFC Bank.

Disinvestment through buyback, stake sale in Balco and Hindustan Zinc and holdings of SUUTI will be able to provide some buffer." Crisil's fiscal deficit estimate for the financial year is 5.2% of GDP, said DK Joshi, chief economist.

Some plan spending will have to be axed, he said. With growth remaining subdued, tax revenues are bound to take a hit. If they use a sledgehammer on spending then they can achieve the target of 4.8% of GDP.

Private estimates are based on the already evident slippage in expenditure management. At the end of the first six months of the current fiscal, receipts were just 37% of the budgeted amount, though spending was in line at 48.6% of estimates, yielding a fiscal deficit of 76% of budget estimates.

Ratings agency Standard & Poor fs recently said that it would review India fs rating --barely investment grade BBB- on which it has a negative outlook -- only after a new government takes over after next year fs elections.

However, it has warned that it may review this earlier if there is a sharp deterioration in the fiscal situation.