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India faces lengthy path to cutting deficit: S&P

India faces lengthy path to cutting deficit: S&P
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First Published: Thu, Apr 29 2010. 04 49 PM IST
Updated: Thu, Apr 29 2010. 04 49 PM IST
Mumbai: It will take several years for India to get its combined fiscal deficits to desirable levels, a Standard and Poor’s analyst said, adding that the country was unlikely to see a direct impact from Greece’s rating downgrade.
Takahira Ogawa, S&P’s director for sovereign and international public finance ratings, also said inflation is unlikely to decline to the Reserve Bank of India’s projected 5.5% by the end of the fiscal year in March 2011.
India’s combined state and central fiscal deficit stood at 9.7% of GDP in the fiscal year that ended in March. A government panel has recommended bringing that down to 5.4% by 2014-15.
“It will take several years even if they follow the 13th Finance Commission’s recommendations to go back to the 5.4% levels recorded in 2006-07,” he said.
“We would like to see early progress of the fiscal consolidation but we need to see a sustainable improvement,” Ogawa said in a phone interview from Singapore.
S&P lifted its outlook on India to stable from negative in mid-March, citing an improving fiscal position and strong growth. In affirming its BBB- long-term and A-3 short term credit ratings on India, S&P had said ratings remained constrained by a high debt burden and deficit, and said inflation is a worry.
A sustainable improvement in India’s fiscal health, combined with a strong macroeconomic environment could lead to a rating upgrade for India, Ogawa said, but he declined to give a timeframe or set parameters.
He said India faces little direct impact from this week’s Greek sovereign rating downgrade as most of India’s government debt is in local currency and its growth prospects were strong.
India, the world’s second-fastest growing major economy after China, is expected by the government to grow around 8.5% in the current fiscal year and 9% in the following year.
Ogawa said soaring prices are a worry for India and said the RBI’s inflation projection of 5.5% for end-March 2011 would be difficult to achieve.
Wholesale price index (WPI) inflation reached 9.9% on an annual basis in March.
“The actual inflation could be higher than the RBI’s comfort level,” Ogawa said, adding that he expects it to be at 6.5% at the end of March.
Last week the RBI raised its key policy rates and the cash reserve ratio by a modest 25 basis points each in a bid to fight inflation. Further rate increases are widely expected.
Ogawa said the success of the upcoming summer monsoon is critical not only to keep inflation in check and economic growth on track. A poor monsoon, which India endured last year, could prove a setback for India’s fiscal health if the government is compelled to spend on food subsidies, he said.
He said he favours allowing fuel prices to be determined by the market, which India is contemplating, as subsidies add to the country’s fiscal burden. Removing the subsidies is politically fraught, however.
“The government may want to take a step-by-step approach rather than a very drastic step of abolition of subsidies,” Ogawa said.
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First Published: Thu, Apr 29 2010. 04 49 PM IST
More Topics: Fiscal deficit | RBI | GDP | Interest rates | Subsidy |