New Delhi: Even while expectations are that the government would be hard-pressed to stick to its target of gross borrowings, or fiscal deficit, the underlying macroeconomic assumptions premised on worst-case scenarios could, if the global outlook is a lot less worse than anticipated, provide a substantial cushion to finance minister Pranab Mukherjee.
A senior official from the finance ministry, who asked not to be named because he was not permitted to talk to the media on this topic, said there is a fair chance the government will be able to stay within the bounds of the proposed fiscal deficit of 6.8% of gross domestic product this year—a claim also endorsed by some analysts.
For example, the oil price estimated for 2009-10 by the government is around $80 (Rs3,896) per barrel. Currently oil is trading at $60 per barrel, and the highest price was $72 per barrel this year. The price of oil is key for the government because of its subsidy programme, wherein public sector oil companies absorb the differential between the international and domestic retail prices of petroluem products. If the oil price stays below the government’s estimate, then they will not incur additional petrol and diesel subsidy costs.
Similarly, the official argued that the government may have marginally over-estimated expenditure with its decision to keep its allocations to the maximum possible, especially since expectations are that some of this will remain unutilized. The National Rural Employment Guarantee Scheme, which guarantees 100 days paid work a year to at least one member of every rural household, had its allocation raised to Rs39,100 crore. But the government does not expect any overflow, even in the worst-case scenario of a failed monsoon and 50 million people using this service, the official said.
Similarly, the estimate of receipts from disinvestment of shares in public sector companies is conservative. The plan to raise Rs3,000-3,500 crore from disinvestment in 2009-10 fell short of the expectations of investors. The official admitted the government understated potential proceeds from disinvestment because it wanted to leave room for an upside surprise. However, a lot will depend on whether the current buoyancy in the stock markets endures.
According to the same official, the real risk posed to the fiscal deficit would be a slower-than-expected recovery of the Indian economy. The decline in consumption would further dent tax collections, especially indirect taxes—they have been cut twice as part of the stimulus packages that contributed to the upward revision of the fiscal deficit for 2008-09.
While the financial markets initially took a pessimistic view of the Budget, the credit rating agencies were more sanguine.
For example, Moody’s Investors Service reaffirmed its sovereign ratings for India’s local and foreign currency debt. “The headline fiscal deficit (announced in the Budget) is not inconsistent with our credit rating for India,” said Aninda Mitra, senior analyst for Moody’s Sovereign Risk Group.
But Mitra stopped short of saying he was positive about India’s fiscal health in the aftermath of the Budget. “An absence of pessimism doesn’t mean we are positive,” said Mitra, who is based in Hong Kong. Moody’s has reaffirmed India’s credit rating of BA2 for local currency debt, which is below investment grade, and BAA3 for foreign currency debt, just about investment grade.
In a report called “India’s pro-growth budget postpones medium-term reforms”, authored by Mitra, it said “the overall deficit out-turn is larger than those of India’s BAA- and BA-rated peers, but it is—at the same time—based on conservative macro-economic assumptions, and still broadly consistent with the near-term stability in the government’s debt trajectory”.
A major hurdle for India’s fiscal outlook is the implementation of the goods and services tax (GST). Analysts expect this tax will be a reliable source of revenue for the states and the Centre and could help remedy the fiscal deficit. Moody’s has said that its ratings outlook on India hinges on the roll-out of a nationwide GST by early 2010 to enhance revenue potential.
However, some commentators do not think this timeframe is realistic. Mitra said he doesn’t expect the entire project to be completed within that relatively tight deadline.
“If they don’t make any progress at the state or Central level with GST, then that would be a cause for concern,” said Mitra.