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 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 recognize 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 endeavor."
AGENCY'S NEGATIVE OUTLOOK
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 B.B. 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."
An electrifying election campaign by avowed modernizer Modi,
followed by his landslide victory on May 16 triggered repeated
record highs on India's stock exchanges. The rally seem to have
ended, at least temporarily, with the NSE index down 3.6 percent
this week, its biggest weekly loss in over nine months.
OPTIMISTIC TARGET
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 Indians.
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.
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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 year.
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.
REVIVING INVESTMENT
Given its tight spending obligations, the government has increased
its reliance on the private sector to revive growth, betting on
public-private partnerships (PPPs) to expand the railways, gas
pipelines, airports and roads.
Given over-capacity in Indian industry after the longest slowdown in
quarter of a century, and a history of failed PPP projects over the
past decade, many companies were reserved in their reaction to the
budget.
"The investment cycle is something you can't just switch on
overnight," R. Shankar Raman, chief financial officer at Larsen &
Toubro, told Reuters.
Raman, whose company builds urban metro trains, engineering
equipment and military equipment, said budget measures to allow more
foreign investment in defense and a focus on infrastructure would
help but said the government's overall increase in capital
expenditure was low.
"Understandably so. Where are they going to get the money from?"
Raman said. "My sense is the larger allocation will come in the
2015/16 budget."
(Additional reporting by Tommy Wilkes and Rafael Nam; Editing by
Richard Borsuk)
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