The ‘fallen angels’ of India

The ‘fallen angels’ of India
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First Published: Tue, Feb 24 2009. 09 35 PM IST
Updated: Tue, Feb 24 2009. 09 35 PM IST
Last week’s interim budget may not have delivered any surprise punches, but it did underscore the United Progressive Alliance (UPA) government’s runaway fiscal deficit. Now, as a further reminder, India’s credit rating is under threat.
On Tuesday, credit agency Standard and Poor’s (S&P) reduced the outlook on long-term debt from stable to negative for four government entities, and, in turn, the government. It cited as its rationale India’s large fiscal deficit, which it estimates at 11.4% of GDP for 2008-09 (consolidated for the Centre and the states). Last week, Fitch too had called India’s finances into question.
The bond market is keenly aware of this dilemma. The government on Tuesday auctioned Rs12,000 crore worth of securities, the first instalment of its process to borrow Rs46,000 crore from the market to cover its overextended budget targets. Yields for these bonds were already forecast high: The 13-year note, expected to yield 7.39%, fetched 7.5%.
S&P’s current credit rating for the government is BBB minus: If this gets any lower— which is likely, according to a recent Citigroup report—sovereign debt would be classified as “junk”, bonds with lower prices and higher yields to reflect a high risk of default. Michael Milken, who made a fortune off junk debt in the 1980s, referred to such bonds as “fallen angels”. That’s a term that neatly encapsulates India’s fiscal situation.
A year ago, with a bull market and surging tax revenues, the government’s estimate for the 2008-09 deficit (for the Centre) was 2.5%. After throwing cash at loan waivers, fertilizer subsidies and rural job schemes, that estimate has today become 6%, or even 7.5% by some arithmetic. How such healthy finances could be converted into what S&P calls “unsustainable” deterioration is a case for the textbooks.
The UPA government is now scrambling to resuscitate the economy. Parliament passed a temporary cut in service and excise taxes worth Rs30,000 crore on Tuesday, also extending an earlier excise tax cut into the next fiscal year. It’s unclear if such temporary measures will help now. If anything, they will draw more red ink into India’s balance sheet for the next two years.
In the meantime, government responsibility remains elusive, and the fiscal bomb keeps ticking.
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First Published: Tue, Feb 24 2009. 09 35 PM IST