| NEW DELHI/MUMBAI, July 11
NEW DELHI/MUMBAI, July 11 New Indian Prime
Minister Narendra Modi is under pressure to perform on the
economy after a budget packed with ambitious targets met mild
scepticism 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."
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 moderniser 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.
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
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.
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 defence 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)