Missing fiscal roadmap rankles raters

Standard & Poor's (S&P) credit analyst Ping Chew said the Budget has shown "a lack of success" in reducing the country's deficit burden.

He said "given the strong growth being experienced by the economy, it is surprising that better progress could not be made. Conversely, it must give rise to worries concerning India's future fiscal performance should growth rates become less favourable."

Fitch Ratings said India's proposed Budget falls short of expectations in terms of fiscal consolidation. This, in part, reflects the realities of India's coalition politics whereby the reformists in the government need to balance fiscal consolidation against the need to boost spending on social and physical infrastructure and continue with large subsidies.

ICICI Securities said the Budget had an unpleasant surprise in store with the government deciding to suspend the fiscal responsibility and budget management rules for the financial year 2005-06. This is on top of the failure to meet the budgeted targets for revenue and fiscal deficits in 2004-05.

Dominique Dwor-Frecaut of Barclays Capital said the constraints of coalition politics largely drive the main features of India's budget for FY05-06.

Deficit targets under the Fiscal Responsibility and Budget Management Act (FRBMA) are exceeded, although not by much, while only general principles are provided on areas of reform likely to prove contentious among coalition members.

The main reason for the suspension seems to be the impact of the 12th Finance Commission recommendations. The finance minister said "consequent to accepting the recommendations of the twelfth finance commission and the drastically changed pattern of devolution and funding, there has been a considerable strain in making the cudget. I was left with no option but to press the pause button vis-à-vis the FRBM Act. I am relieved that we have not been forced to go in the opposite direction."

ICICI Securities said the real reasons for the rise in revenue and fiscal deficits are the higher outlay for social sector spending in line with the ruling alliance's common minimum programme, Rs 5,000 crore budgeted for VAT compensation and the government foregoing the option of using any disinvestment proceeds for financing the deficit.

S&P's Chew said "government debt is the main obstruction in the path of further improvements in India's credit ratings, and stands out in contrast to the many positive economic indicators displayed by India in recent years," Chew said.

The combined central and state government deficits will amount to 10 per cent of the GDP in the near term, leading the consolidated debt of the central and state governments to rise gradually for the next few years from more than 80 per cent of GDP currently.

S&P said although the fiscal outcome continues to disappoint, a more positive aspect of the Budget is the emphasis given to infrastructure spending and tax reform.

Likewise, the 21 per cent growth in taxation revenue in 2004/2005, and an expected growth of similar proportions this year, must be regarded positively in relation to India's ability to service its debt burden.

For example, in 2003/2004, interest expense took up 47 per cent of central government revenue, while in 2005/2006 the ratio is expected to fall to 38 per cent.

Barclays' Dwor-Frecaut said the budget provides for massive public spending on infrastructure, but it carries the risk of overheating and the resultant inflationary pressures.

Fitch analyst Shelly Shetty said "we are disappointed that the government has largely ignored the opportunity for faster fiscal consolidation at a time of higher growth."

She said Fitch was disappointed that the authorities refrained from cutting subsidies drastically and cutting interest rates on small savings instruments, which continue to burden the public finances and reduce the effectiveness of monetary policy.