Narendra Modi feels heat from credit agencies, markets on budget
NEW DELHI: Prime
Minister Narendra Modi is under pressure to perform on the economy after a
budget packed with ambitious targets met mild skepticism from investors and
credit-rating agencies and failed to dispel the latent risk of a downgrade.
With varying degrees of
severity, Fitch, Moody’s and Standard & Poor’s all expressed worries that
Finance Minister Arun Jaitley’s pledge to keep this year’s fiscal deficit to
4.1 percent of gross domestic product looked unrealistic.
While the budget
unveiled a number of measures to attract foreign investment, Jaitley’s revenue
and growth numbers were predicated on a major revival in private investment
across the economy - one that is by no means guaranteed.
The finance minister
seemed to recognise the risks to his own forecasts in an interview he gave
state broadcaster Doordarshan after the budget speech, saying that the deficit
target was a challenge he had accepted with a caveat.
“I have told the people
that revenues are low, the monsoon is not extremely bright this time - the
prospects ... therefore this is a challenging task,” Jaitley said. “I am
accepting the challenge and I will endeavour.”
S&P, the only one
of the three main agencies that has India on a negative outlook, said that the
sovereign debt of Asia’s third largest economy could be rated “junk” within a
year if the government fails to revive low economic growth.
Prior to Thursday’s
budget announcement, Jaitley and Modi had created expectations of tough reform
with warnings of ‘bitter medicine’ and broadsides against ‘mindless populism’.
So there was some surprise that the budget chose not to rein in the subsidy bill
that drives up the deficit.
“Mr Modi promised a
bitter pill, but Mr Jaitley preferred to make it sweet,” said BB Bhattacharya,
a prominent economist.
Atsi Sheth, Moody’s
sovereign rating analyst, told Reuters: “The finance minister did say that we want
to reduce fuel and food subsidies, but how exactly that will happen was not
clear in this budget statement.”
election campaign by avowed moderniser Modi, followed by his landslide victory
on May 16 triggered repeated record highs on India’s stock exchanges. The rally
seems to have ended, at least temporarily, with the Nifty down 3.8 percent this
week, its biggest weekly loss in over nine months.
Jaitley, who worked
closely with Modi to draw up a budget they see as a blueprint for future
growth, based his deficit calculations on a 19 percent increase in tax revenue
- an optimistic target given his decision to offer tax breaks to middle-class
If growth doesn’t
revive in the second half of the year ending March 2015, then there will have
to be a “very concerted effort at expenditure reduction" or the fiscal
deficit target will be "missed by a couple of decimal points”, Sheth said.
Many market watchers
think Jaitley missed an opportunity - both to take a tough stance on subsidies
while the government's political stock is high at the start of its five-year
term, and to create headroom for greater infrastructure spending.
Jaitley was widely
expected to scrap the 4.1 percent fiscal deficit target set by his predecessor,
who left a stack of bills he owed to state oil companies for unpaid subisidies.
These have already eaten up almost half of the targeted deficit this fiscal
A day before the
budget, D.K. Joshi, principal economist at the Indian arm of S&P's, CRISIL,
said he thought a target of 4.5 percent of GDP was more credible.