Is a junk rating inevitable for India?

Thu, 2 Aug Pre-Open

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In a wake-up call to the government to put its act together on the macroeconomic front, global rating agency Standard & Poor's (S&P) has scaled down India's credit rating outlook from 'stable' (BBB+) to 'negative' (BBB-) with a warning of a downgrade (to junk rating) if there is no improvement in the fiscal situation and political climate.

However with just three months into the fiscal and the Centre's finances has already begun to show slippages with high levels of deficit. The fiscal deficit, which is the difference between the government receipts and spending, touched Rs 1.9 trillion for three months ended June 2012 (1QFY13). This is 37.1% of the target of Rs 5.1 trillion set in the budget in March 2012. This means, in three months, the government has already spent one-third the money it planned for the full year. In seems that the government has not learned anything from the rating agency's warning and could miss its fiscal target for FY13 also.

In fact, the deficit was high in the first quarter despite taxes fetching reasonable revenues and plan expenditure not rising much. The main reason for high deficit was the decline in non-debt capital receipts. This is because the government's disinvestment programme has so far not raised any revenues of the Rs 300 bn pegged so far. Non plan expenditure also increased substantially and accounted for 23.2% of budget estimates for 2012-13, against 21.2% in the corresponding period of last year.

The government can bring down the fiscal deficit only by cutting expenditure. Many of the revenue expenditures like interest payments, defence, etc., and some capital expenditures like loan repayment are committed and cannot be reduced. The only expenditures that can be brought under the axe are subsidies and investment.

A cut in subsidies, though desirable, is politically difficult and it seems that the government is not willing to bite the bullet on fuel subsidies. On the contrary, subsidies are bound to increase with the introduction of the Food Security Bill which is already pending in Parliament and the drought like conditions prevailing in the country.

So unless urgent reforms are undertaken by the government, the fiscal situation is not likely to improve any time soon. In fact with economic growth slowing down, revenues to the government might also take a hit, thus adding to the fiscal woes. It is time for the government to end policy paralyses and take some tough decisions.