Most people have begun to mark down next year’s growth, which must affect the revenue part of public finances...
We have done the same. Let me say this about the growth outlook: We are not rating growth either. We don’t want to move countries’ ratings higher when they grow quickly and move them lower when they grow slowly. You are right, it has fiscal implications. If the fiscal situation is already stressed, which it is in India to some degree, that can add additional stresses and at times can highlight other fiscal weaknesses and lack of fiscal flexibility.
A number of countries in Asia, China being the most evident now..., are embarking on a large fiscal stimulus package. India is not in a position to do that. Public finances are not as flexible as those of China because previous deficits have built up a large debt stock which must be serviced. It can’t respond to cyclical needs in the same way that countries with a stronger public finance position can. So, growth matters. The number we (are) working with now for growth for the next year is 6%. The risks to that outlook are clearly to the downside. We could easily see growth slipping to below 6%.
If we look at the past fiscal performance and where the strengths have been, it has been on the revenue side. It hasn’t been through spending cuts. (There are) at least two reasons for that. One is stronger economic growth, raising tax revenue. Number two, there has actually been pretty significant improvement in tax administration. That shouldn’t go away, that will continue even through the downturn. That’s an important improvement for the medium term.
When we think about India’s public finances in the longer term, where are the needs for continued efforts? It is on the spending side. There’s some probably unpleasant and difficult political decisions that need to be made about spending priorities and how the government can continue to reduce the overall deficit or, in fact, keep it at a level of 3%, but provide public services that are needed to support growth and reduce poverty level.
The passage of the Fiscal Responsibility Bill had an impact on the assessment of rating agencies as it indicated multi-party support for fiscal rectitude. The law did provide the government of the day space to slip up, and they did. It is going to be very difficult to convince the people once again. How would you react to that?
Fiscal responsibility legislation cannot transform public finances but it does indicate there’s an issue authorities are taking seriously. The fact that it is there, in our view, is good.
Moving to foreign currency, what are the stress factors you see?
The stress factors are really on the capital account side. It is not necessarily the current account. The current account is going to be supported by the reduction in oil prices.