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ShareThe budget did not reinforce confidence in the Indian government's commitment to fiscal prudence and structural reforms, but there are no egregious pressures to lower India's sovereign rating right now, says Moody's Investor Services vice-president and senior analyst Aninda S Mitra in an interview with DNA on the phone from Singapore. Excerpts:
Did you find what you were looking for in the budget in terms of signs of fiscal prudence and structural reforms?
In a word, no.
Did you find the headline fiscal deficit number disconcerting?
No, it's not. It's in line with our expectations. But beyond that, the budget did not contain any specifics.
In the week before the budget, domestic fuel prices were raised. The finance minister has said he will appoint a committee to rationalise fuel prices and lower subsidies. Are these reassuring?
Yeah, it is a positive step that they hiked the oil prices. It sent out a signal that they were willing to do the right thing and had political willingness, which the previous government lacked, given its reliance on leftist allies. But I should add that just because we haven't seen much by way of privatisation in the budget, it doesn't mean it will not happen. The government is perhaps going through a more concerted internal dialogue to come up with some mechanism to identify companies and how much of a stake to reduce and so on. That's not something that can happen in a flash -- or in a linear fashion.
The Finance Commission recommendations are due out in October. Do you see that as a defining moment in the return to fiscal prudence?
Possibly. In a post-budget announcement, government officials have looked at considering 5-5.5% fiscal deficit in 2010-2011, and somewhat lower in FY 2012. That could be an effort at aligning the fiscal framework towards what the 13th Finance Commission may recommend. Alongside if they do indeed carry out reforms to the administered price mechanism, that may help to limit off-budget subsidies significantly.
It's off-budget subsidies that have slowed down fiscal consolidation in India. It's a bit like you telling your wife that you'll quit smoking -- but if you go to the office and smoke anyway you haven't really quit. It's a similar concept. Hopefully, they will quit running up off-budget subsidies.
You had earlier said you were wary of the "populist inclinations of the government". Did you see more of that in the budget?
I think that's still there, but it's not an area of immediate concern. But one thing that does concern me is this attempt to use fiscal policy tools to bridge structural deficiencies in the system in the name of 'inclusive growth'. No matter what, you are going to see agriculture growing at 3-4% (if you are lucky); meanwhile, the trend rate of growth in the services sector is going to be 10%. Hence, the average earnings of a farmer are always going to grow far slower than the average earnings of an IT worker or a manufacturing worker...
To intend to bridge that gap by using fiscal policy tools is not a fruitful exercise. You could design a new mechanism to bring about more inclusive growth, but such programmes should be self-financing or the government should consider reprioritising expenditures substantially.
While reviewing India's sovereign rating outlook, what factors -- other than the headline fiscal deficit numbers -- do you consider, and how did they influence you?
We look at issues like how financeable the debt is. The markets got a bit spooked about the size of the borrowing requirement of the central government... We are also seeing a slowing down of private-sector credit growth. These will not result in any immediate crowding out pressure, but if and when we do see that, what will be the government's attitude towards unwinding its debt... those are some of the things we look at.
So, when is the Indian sovereign rating due for a revision?
We are not looking at revising our outlook at this stage. We are monitoring developments every day, but there are no egregious pressures at this stage. Some of the potential unforeseen circumstances that we remain concerned about are the possibility of a potential contingent liability coming out from a large PSU requiring a big bailout. What is the mechanism that will be put in place for a rescue package, if one were required? At this juncture these shocks are unlikely, but we do consider them.
