The Hindu : Business : Divergent views of rating agencies on budget

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Thursday, Mar 03, 2005

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Divergent views of rating agencies on budget

By Our Special Correspondent

NEW DELHI, MARCH 2. The Finance Minister P. Chidambaram's budget package for the new fiscal has drawn widely divergent perceptions from two international rating agencies. Even as Credit Suisse First Boston (CSFB) has hailed the budget as good for growth and neutral for inflation while not reading too much into the `pause button' pressed by Mr. Chidambaram on the fiscal deficit target, Fitch Ratings has said that the package for 2005-06 falls short of expectations in terms of fiscal consolidation.

CSFB has virtually brushed aside the fact that the fiscal deficit target for the new fiscal year has been set at 4.3 per cent of the gross domestic product (GDP) instead of the 4.2 per cent gap as originally planned under the Fiscal Responsibility and Budget Management (FRBM) Act. It has said that the "key issue regarding the fiscal slippage in 2005-06 is whether inflation accelerates, the Reserve bank of India embarks on an aggressive hiking cycle, the public sector banks' willingness to continue buying government securities diminishes and liquidity dries up.''

"We believe the risks of significant fiscal slippage in the new fiscal are limited,'' CSFB has said. "We do not think the main issue is the headline fiscal deficit number in terms of whether a slippage will occur.

It said it was important to recognise that the grants to States and Union Territories are budgeted to increase to 6.6 per cent of the total expenditure in 2005-06 from around 3 per cent in the current year, while Plan capital expenses for States have dropped sharply to 0.1 per cent from 4.8 per cent of the total expenditure.

Hence, the Central Government's objective, CSFB said, is to increase incentives for State governments to improve performance in their respective jurisdictions through larger current expenses and curtailing capital investment until State level institutions are strong enough.

In contrast to CSFB perception, Fitch said that not keeping to the fiscal deficit target reflected the realities of India's coalition politics whereby the reformists in the Government need to balance fiscal consolidation against the need to boost spending on social and physical infrastructure and continue with large subsidies.

However, it noted that the reform agenda has been carried forward somewhat, as the long-delayed State level VAT is expected to be introduced in 2005-06.

"We are disappointed that the Government has largely ignored the opportunity for faster fiscal consolidation at a time of higher growth,'' said Shelly Shetty, Fitch analyst on India. Surpassing the targets set by the FRBM Act would have boosted investor confidence significantly, as it would have reflected the Government's ability to pursue a more aggressive front-loaded fiscal consolidation process, Fitch said.

Instead, the authorities have used the excuse of greater transfer of resources to States (as recommended by the Twelfth Finance Commission) to put on hold the deficit-reducing provisions of the FRBM Act in 2005-06, which does little to improve the credibility of this act.

The fiscal deficit target of 4.3 per cent of GDP for 2005-06 is quite unambitious, especially when growth is expected to remain close to 7 per cent. This, in turn, raises concerns about India's fiscal situation.

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