Mon, Mar 04, 2013 - Page 4 News List

India tries to avert rating downgrade

GOING OVER THE NUMBERS:Some analysts say the Indian finance minister’s budget cut pledges and tax collection assumptions might be overly ambitious

AFP, NEW DELHI

A sniffer dog is used to inspect budget related papers before they were taken inside parliament before Indian Finance Minister Palaniappan Chidambaram, unseen, delivered the annual budget speech in New Delhi, India, on Thursday.

Photo: AFP

Indian Finance Minister P. Chidambaram pledged in his budget to cut a gaping fiscal deficit in a bid to avert a damaging credit ratings downgrade, but economists remain skeptical he can meet his goal.

In last week’s budget the minister also hiked spending by a 16 percent in an effort to woo India’s electorally crucial rural masses in the countdown to general elections early next year.

However, analysts fear his plans are overly ambitious in the face of India’s tepid economic growth.

Wary of ratings agencies which have threatened to lower the country’s credit rating to junk, the minister promised to slice the fiscal deficit to 4.8 percent of GDP in the fiscal year to March next year, down from 5.2 percent.

The deficit goal is a “signal to the world” that India is “following a fiscally prudent path,” said Chidambaram, now increasingly touted as a potential prime ministerial candidate in next year’s elections.

Reigniting foreign confidence in India — once a global investment star — has been a key aim of Chidambaram since returning to the ministry last year with India needing US$75 billion in annual inflows to fund its huge trade deficit.

Chidambaram, presenting his eighth budget of a two-decade political career, insisted his deficit cutting numbers were “credible” in the face of financial markets’ alarm at the scale of his spending increases.

He raised outlays on education by 17 percent, health by 24 percent, agriculture by 22 percent and rural development by 46 percent.

He also earmarked US$1.8 billion for a flagship food security bill intended to provide cheap grains to India’s poor that is central to the Indian Congress government’s bid to restore its flagging fortunes with polls looming.

Analysts say Chidambaram, despite his reputation as a hard-headed pragmatist, may be relying on overly optimistic revenue projections to pay for his spending promises.

Expansion is officially projected to be 6.1 to 6.7 percent next year — far below near double-digit rates clocked up in earlier years — but most private economists expect it to be in the area of 5 to 5.5 percent.

In the current fiscal year growth is expected to clock 5 percent — the weakest in a decade.

“These headline [deficit-cutting] numbers will come as a relief to the rating agencies,” Credit Suisse economist Robert Prior-Wandesforde said.

However, he added there may be disappointment when they look at the underlying numbers.

Chidambaram outlined spending plans totaling 16.7 trillion rupees (US$310 billion) and he is assuming strong revenue growth to pay for it, including sales of state assets in a widely acknowledged tough market and an auction of the telecoms spectrum, even though a recent offering bombed.

Chidambaram’s tax collection assumptions are also under question, said Surjit Bhalla, chairman of Indian emerging markets investment firm Oxus.

“Tax revenue is projected to gallop by a voodoo 19 percent,” Bhalla said in the Indian Express daily, adding that “such a swelling is most unlikely, given the slow growth of the Indian economy.”

For the moment, it looks like Chidambaram is getting the benefit of the doubt.

Both Fitch and Standard and Poor’s, which had warned they might strip India of its prized investment grade credit status, say they are leaving their ratings untouched, but have warned of a risk of a spending overshoot.

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