Another Year Of Fiscal Disappointment
BMI View: India's central government has ploughed through 76% of its FY2013/14 (April-March) fiscal deficit target of INR5.43trn in just six months, and it is difficult to envisage the authorities making a concerted effort to rein in spending now that election season is upon us. While the deficit may be contained via greater-than-expected divestment proceeds and/or spending deferrals into next fiscal year, neither option gets to the heart of India's fiscal problem. A downgrade to junk status therefore, while unlikely, cannot be ruled out.
India's inability to put its fiscal house in order remains a key obstacle to a sustainable recovery in economic growth. Indeed, while the Reserve Bank of India (RBI) has been busy tightening interest rates in a bid to anchor inflation expectations and iron out macroeconomic imbalances, we have yet to see a similar resolve from the Indian government. According to latest finance ministry data, the central government has burnt through 76% of its FY2013/14 (April-March) fiscal deficit target of INR5.43trn in just six months of the fiscal year. As ever, the government's inability to keep non-planned expenditure (which includes interest payments, major subsidies, and social services) in check at a time of weak tax revenues has been the main culprit of the widening fiscal deficit (see chart below).
It is difficult to envisage a major reduction in spending now that election season is upon us. India is constitutionally required to hold general elections before May 31 2014, when the current Lok Sabha (parliament) completes its four-year term. With the ruling United Progressive Alliance (UPA) facing an uphill battle to stay in office, it is difficult to see the administration of Prime Minister Manmohan Singh turning its back on the tried-and-trusted method of pre-election populist spending. In FY2008/09, ahead of the last general elections, central government current expenditures were ramped up by a remarkable 33.5%. While this is partially explained by counter-cyclical policy in the wake of the global financial crisis, much of the spending spree (most notably the Mahatma Gandhi National Rural Employment Guarantee Act) was actually introduced before economic activity started to head south. This time around, the government has announced another major social spending programme, the National Food Security Bill 2013, which again will put added strain on the fiscal coffers. With this in mind, the chances of a concerted effort to rein in expenditure look slim, in our view.
|Too High For Comfort|
|India - Annualised Fiscal Deficit|