Modi feels heat from credit agencies, markets on Budget

NEW DELHI — Indian Prime Minister Narendra Modi is under pressure to perform on the economy after a Budget packed with ambitious targets was met with 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 (S&P) all expressed worries that Finance Minister Arun Jaitley’s pledge to keep this year’s fiscal deficit to 4.1 per cent of gross domestic product looked unrealistic.

While the Budget unveiled a number of measures to attract foreign investment, Mr 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.

S&P, the only one of the three main agencies that has India on a negative outlook, said 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, Mr Jaitley and Mr 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 Mr B B Bhattacharya, a prominent economist.

Ms Atsi Sheth, Moody’s sovereign rating analyst, said: “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.”

Mr Jaitley, who worked closely with Mr Modi to draw up a Budget they see as a blueprint for future growth, based his deficit calculations on a 19 per cent increase in tax revenue — an optimistic target given his decision to offer tax breaks to middle-class Indians.

Many market watchers think Mr 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.

Mr Jaitley was widely expected to scrap the 4.1 per cent fiscal deficit target set by his predecessor, who left a stack of Bills he owed to state oil companies for unpaid subsidies. These have already eaten up almost half of the targeted deficit this fiscal year.

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 a 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,” said Mr R Shankar Raman, chief financial officer at Larsen and Toubro, which builds urban metro trains, engineering and military equipment.

Mr Raman said the government’s overall increase in capital expenditure was low. “Understandably so. Where are they going to get the money from? My sense is the larger allocation will come in the 2015/16 Budget.” REUTERS