| NEW DELHI
NEW DELHI May 15 India's main opposition party,
set to form the next government, is debating scrapping or
revising a plan to cut the federal fiscal deficit to a nine-year
low over the next three years, sources with direct knowledge of
the situation told Reuters.
While the Bharatiya Janata Party (BJP) is not bound by the
roadmap of the outgoing government, sticking to it will help
stave off a possible downgrade by ratings agencies. Being cut to
"junk" from investment grade could drive up borrowing costs and
trigger capital outflows in Asia's third-largest economy.
India, among the so-called Fragile Five most vulnerable
emerging market economies, saw its markets roiled by capital
outflows from around May to September last year as investors
positioned for the Federal Reserve to taper monetary stimulus.
The current five-year fiscal plan, unveiled in 2012 by the
Congress-led government, pledges to narrow the deficit to 3
percent of gross domestic product (GDP) by March 2017.
Outgoing Finance Minister P. Chidambaram had won a reprieve
from the agencies by narrowing the deficit by 1.1 percentage
points in the past two years, yet critics question the quality
of fiscal consolidation.
Last year, Chidambaram cut $13 billion in capital spending,
deferred $16 billion in subsidies and squeezed $15 billion in
dividends from state companies to lower the fiscal deficit to
4.6 percent in the fiscal year that just concluded.
"What he has done is creative accounting," said a BJP
economic adviser who spoke on condition of anonymity. "There is
a strong view in the party that we should come out clean with a
new credible roadmap with an equally credible action plan."
That view was shared by two other sources in the BJP, whose
prime ministerial candidate Narendra Modi wants to revive growth
and job creation. That in turn would boost both revenues and the
size of the economy, reducing the deficit ratio over time.
In the short term, however, a fiscal audit could reveal a
hole in the public finances and endanger New Delhi's existing
commitment to cut the deficit to a seven-year low of 4.1 percent
in the fiscal year that began in April.
That pledge rests on Chidambaram's assumptions that federal
spending would grow by 10.9 percent, compared with a recent
average of about 15 percent, and revenues beat a prolonged
economic slowdown to grow by 18 percent.
New Delhi has missed its revenue projections for three years
in a row and this year's projections look equally unrealistic.
India faces the biggest threat of a downgrade from Standard
& Poor's, which rates it at BBB minus with a negative outlook.
Since April 2012, S&P has often flagged concerns over the
country's fiscal health and urged subsidy and tax reforms.
Similarly, Fitch Ratings called for a clear fiscal
consolidation strategy that doesn't come at the cost of
investments that could underpin faster growth in future.
"I would like to see the next government invest aggressively
in capital expenditure and infrastructure creation and at the
same time be able to generate revenues to fund it," said Kishore
Gandhi, chief credit officer at India Ratings & Research, a
Fitch Group company.
Exit polls after the five-week general election showed that
Modi's BJP is likely to unseat the Congress party that has
presided over the worst economic slowdown since the 1980s.
Together with its allies, the BJP is shown by most of the
exit polls winning an outright parliamentary majority. Results
are due on Friday.
Radhika Rao, an economist with DBS Bank in Singapore, said
the next government could get away with a marginal deficit
increase if it produced a credible mid-term restructuring plan.
"You can revise it up to 4.5 percent from 4.1 percent and
say this is based on your (latest) growth and tax revenue
estimates," she said. "But you will need to display a
willingness and clear intent to bring it down over the next
couple of years."
Arun Jaitley, a senior BJP leader and favourite to become
finance minister, told Indian portal Firstpost last week that
the new government would have to lift the "mask" on the budget
and reveal its true position.
"The next government will have sleepless nights correcting
the accounts of Mr Chidambaram," Jaitley told the website.
In anticipation of a Modi win, Indian shares have surged to
record highs and the rupee rallied to its strongest in 10
months. A "junk" rating could revive memories of last summer's
sell-off, which had sent the rupee on a free fall.
However, BJP leader Gopal Agarwal dismissed such fears. "The
market already knows these (budget) figures are not correct.
Already this has been discounted," he said.
Expectations that some spending cannot be deferred have
turned investors sceptical the new government can meet this
year's deficit target. Many are anticipating a higher shortfall
in a new budget, due by July.
Although the BJP leaders, including Jaitley, have yet to
commit to a timeframe for restating public accounts, officials
in the finance ministry are advising caution as any such move
could trigger a ratings action.
They attribute the problem to India's cash accounting, in
which income and expenses are recorded when cash is paid. Many
advanced economies follow accrual accounting, in which payments
are recorded as they occur regardless of whether cash has
actually changed hands.
"Switching to accrual accounting will take care of this
issue. But it can't be done overnight," said one senior ministry
official. "Until then, you have no option but to stick to stated
fiscal deficit targets."
(Additional reporting by Shyamantha Asokan and Nivedita
Bhattacharjee; Editing by Douglas Busvine and Jacqueline Wong)