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Wednesday, July 23, 2014  

India may miss fiscal deficit goal, faces pressure to avert rating cut
NEW DELHI India will likely miss its revised fiscal deficit target for the financial year ending in March, a poll showed, putting a question mark over the country’s efforts to avert a credit rating downgrade.

Under pressure from global rating agencies and its own central bank, the government unveiled a new plan last week to keep the fiscal deficit at 5.3 per cent of gross domestic production (GDP) this financial year, higher than a previous target of 5.1 per cent but lower than last year’s 5.8 per cent.

However, higher spending on fuel and fertiliser subsidies along with lower-than-estimated non-tax receipts are likely to keep the deficit at last year’s levels, according to a poll of 21 economists. That could force New Delhi to borrow an extra Rs400 billion via bonds as early as December.

“Measures taken are fairly limited, like a reduction in the subsidy in diesel prices is modest ... and actual data until September shows that the revenue performance is very weak,” said Andrew Kenningham, an economist at Capital Economics. “Growth is not expected to pick up significantly this year so there is no reason to be optimistic that they are going to come near the target.”

India’s fiscal deficit is the widest among major emerging economies due to huge spending on subsidies for items such as food, fuel and fertiliser. Subdued tax revenues in a slowing economy have aggravated fiscal strains and both Standard and Poor’s and Fitch have placed “negative” outlooks on India’s current BBB-minus ratings.

With the prospect of downgrade to junk status looming large, the government has announced a slew of reforms since mid-September, raising the price of subsidised fuel and fertilizer, and lifting the bar on foreign investment in the airline, insurance, pensions and retail sectors to shore up the flagging economy.

Although markets cheered those measures, 14 of 17 economists polled think the latest reforms would not avert a downgrade. “There is a risk of a rating downgrade as the reforms were only a marginal correction in the fiscal situation,” said Kenningham.

Despite the recent hikes in prices of fuel and fertilizer, the government’s subsidy bill is expected to remain inflated. According to the poll, spending on fuel and fertilizer subsidies is estimated to be Rs1.6 trillion this fiscal year, higher than the Rs1.04 trillion budgeted in March. Under a new fiscal consolidation plan, New Delhi will focus on economizing existing expenditure and reducing waste.

Reuters
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