Cutting deficit: Moody’s flags lack of details in Budget

BL 11 July 14

But the target addresses a key constraint on rating and may strengthen govt finances

 Moody’s Investors Services has said that the BJP Government’s maiden Budget lacks details on how fiscal consolidation will be achieved in the coming years.

But the deficit targets reflected in the latest Budget document are likely to stem a further weakening of government finances and address a key constraint on India’s Baa3 sovereign rating, Moody’s said in a note published in New York on Friday.

Calibrated correction

As a preliminary indicator of policy intent, the Budget supported the rating agency’s baseline assumption that a reversal of weak fiscal and economic trends is likely in India.

But it will be slow and calibrated, rather than immediate and rapid.

This assumption underpins the stable outlook on India’s Baa3 sovereign rating, Moody’s added. From a forecast of 4.1 per cent of GDP for end March 2015, the Centre’s fiscal deficit is projected to come down to a level of 3 per cent of GDP by March 2017, the latest Budget announcement showed.

On Thursday, Finance Minister Arun Jaitley presented the Union Budget for 2014-15— the first major fiscal and economic policy statement of the Modi Government.

While the projected fiscal deficit numbers will provide some comfort to international rating agencies, the main issue raised by several economy-watchers is the reliability of these numbers.

Moody’s said that the Budget document lacked details on revenue and expenditure measures to lower the deficit.

This makes it difficult to assess the likelihood that future deficit targets will be met.

It was also pointed out that the Government’s avowed intention to reduce subsidy expenditure was not accompanied by proposed changes to the current subsidy regime. Similarly, the commitment to implementing the long-planned Goods and Services Tax was reiterated but, again, without guidance on its details.

Inflation concerns

Unless GDP growth revives from current levels, tax revenues could be lower than forecast, jeopardising the deficit target, Moody’s has said. On the growth-promoting measures announced in the Budget — increase in FDI limits in the insurance and Defence sectors; higher government spending on irrigation, road building and other infrastructure development — Moody’s said these measures could contribute to growth.

However, they are unlikely to lead to significant acceleration from current levels unless accompanied by a decline in inflation and interest rates, besides fewer regulatory constraints on investment, Moody’s said.

(This article was published on July 11, 2014)

T N Ninan: No shortage of money

  New Delhi  

July 11, 2014 Last Updated at 22:50 IST

The new government is full of good intentions about gettinginvestment going. It justifiably wants to increase investment in the railways because, as the railway minister more or less said, the system is in a shambles. It also wants more roads, ports, metro transport systems, airports, broadband lines to every village, industrial corridors, smart cities and more—all of which the finance minister mentioned in his Budget speech. The problem is that it finds itself constrained by the lack of resources. The railway minister held out the weak and unconvincing promise of foreign investment and public private partnerships making up for the government’s lack of funds; the finance minister simply doled out small amounts of cash that were clearly inadequate.

The funny thing is that the government has the money—but it is going into subsidies that Mr Jaitley has chosen to leave untouched. Out of the vast sums that the government proposes to spend this year, barely one in eight rupees will go towards capital expenditure, whereas more than that will go into subsidies. If the subsidies reached the poor, there would be some justification for this skew, but everyone knows that is not the case. Whether it is diesel or cooking gas, the wastages in the food subsidy programme or even the fertiliser subsidy which mostly benefits the larger farmers, the poor (who, remember, are mostly landless) are not the primary beneficiaries even if everything is done in their name.

Since this is not a secret, it should be obvious as to whether subsidies or investment in infrastructure should get a higher priority. And since the reality is the opposite of what it should be, one would have expected the new government to re-order spending priorities. Regrettably, it has failed to do so.

It wasn’t always like this. As recently as 2007-08, for instance, capital expenditure was 70 per cent bigger than the subsidy bill, whereas now it is 13 per cent smaller. Put another way, subsidies are up from 1.5 per cent of GDP seven years ago to 2 per cent, whereas capital investment financed by the budget has shrunk from 2.5 per cent of GDP to 1.75 per cent. You can blame the last government for having engineered this massive shift in spending priorities, in the name of inclusiveness—except that it is more inclusive to create jobs than to give handouts. Investment in large rail and road projects involving construction work creates real work at better wages; it also creates real assets while generating demand for intermediate goods like steel and cement—and that generates its own employment, plus tax revenues. The new government implicitly understands all this, but has not acted on its understanding.

It is not enough to say that private and foreign investment will step in to fill the gap in government resources; the bulk of the investment in core infrastructure areas is almost always done with public money, in almost all countries. Devices like public private partnerships serve up to a point but, as was noted in the Budget speech, India already has the largest number of such PPP projects in the world (900 of them), and they have been bedeviled by disputes as well as allegations of corruption. If you can fix the problems with the PPP model, by all means do so because private investment is necessary and indeed should be welcomed for a variety of reasons. But that is not a substitute for putting the government’s money where it should be put. Announcing a new body that will look at government expenditure is simply kicking the ball down the road; the goals have to be scored now—or another year will be lost.

The original version of this article, and the version in print, had some errors in the numbers. They have since been corrected. The errors are regretted.

PM Modi feels heat from credit agencies on Budget

Reuters  |  Mumbai/Delhi  

July 12, 2014 Last Updated at 00:11 IST

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 agenciesand 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.

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.

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."

Government to borrow Rs 6 lakh crore in FY15

July 10, 2014 Last Updated at 17:07 IST | New Delhi

| Press Trust of India
The government is in the process of borrowing Rs 3.68 lakh crore in the first half of this fiscal

The government will in the current fiscal borrow Rs 6 lakh crore, up from Rs 5.63 lakh crore last year, as it repays past liabilities and uses debt to bridge revenue shortfall.

However, the net borrowings will be Rs 4,61,204 crore, after considering repayments of past loans and interests. This is nearly Rs 7,700 crore lower than Rs 4,68,901 crore in 2013-14, according to Budget 2014-15 presented by Finance Minister Arun Jaitley in Parliament.

The government is in the process of borrowing Rs 3.68 lakh crore in the first half of this fiscal, accounting for 61.3% of the total budget target for 2014-15, which will leave more scope for private sector to tap the market in the second half.

The front-loading of borrowing is aimed at making available capital to the private sector in the second half of 2014-15.

The net borrowing through T-bill for first quarter (April-June) was kept at Rs 40,000 crore.

During the fiscal, repayments of loans have been estimated at Rs 1.38 lakh crore as against Rs 95,008 crore a year ago.

Finance Minister said that the fiscal deficit - the gap between expenditure and revenue - will be 4.1% of GDP.

In absolute term, the fiscal deficit estimated at Rs 5,31,177 crore during 2014-15 as compared to Rs 5,24,539 crore in the previous fiscal.

"My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1% of the GDP in the current year. Considering that we had two years of low GDP growth, an almost static industrial growth, a moderate increase in indirect taxes, a large subsidy burden and not so encouraging tax buoyancy, the target of 4.1% fiscal deficit is indeed daunting," the Finance Minister said.

"Difficult, as it may appear, I have decided to accept this target as a challenge. One fails only when one stops trying," he added.

RBI pushback on banks' infra loans

BS Manojit Saha  |  Mumbai  July 12, 2014 Last Updated at 00:58 IST

The new facility will be removed if loans turn NPA; project appraisal to be made more stringent to ensure banks don't go overboard

The euphoria among banks over the Budget proposal that they don't have to maintain cash reserve ratio (CRR) and statutory liquidity ratio (SLR) for funds raised to finance infrastructure projects may be short-lived. That's because the central bank is preparing to come out with stringent norms on the issue.

To start with, the central bank is planning to mandate that such leeway will be given to banks as long as the asset remains healthy. The moment the loan slips to the non-performing category, banks have to set aside funds for CRR and SLR for the entire exposure, highly placed sources in the central bank said.

CRR is the proportion of deposits that banks need to keep with the RBI. Banks don't get any interest for keeping CRR balance. Banks also have to invest a minimum 22.5 per cent of their net demand and time liabilities in government securities, known as statutory liquidity ratio.

The central bank is also planning to make the project appraisal process stringent for banks willing to avail themselves of this facility. "Banks will be permitted to raise long-term funds for lending to the infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and priority sector lending," Finance Minister Arun Jaitley said in his Budget speech.

Central bank sources said, "We will put the controls in the detailed guidelines. We will ensure that banks don't go overboard with this facility. Such fund-raising will only be allowed to fund viable projects."

Time and again, the RBI has voiced its concern over banks lending to infrastructure as it gives rise to an asset-liability mismatch. Leeway on CRR and SLR was a long-standing demand from banks, which the RBI did not agree to till recently.

Central bank sources indicated that banks were already over-exposed to the infrastructure sector, and opening up the channel could expose them to further credit risk.

As a result, proper checks are required to ensure funds are raised for lending to viable projects.

"The liabilities of banks are short-term in nature while assets are long-term, which itself is a cause of concern. In addition, infrastructure projects moved at a very slow pace in the last few years. This has locked up a massive amount of bank funds. Stressed assets in the infrastructure sector have also increased," the sources said.

Infrastructure is one of the five sectors identified by the RBI as stressed. The others are iron and steel, textiles, aviation and mining.

According to RBI data, the gap between liabilities and assets was widest in the shortest maturity bucket. "Maturity mismatch has often been highlighted as a concern for the Indian banking sector, given the sector's increased exposure to long-term infrastructural loans financed primarily from deposits of shorter maturities. Such a mismatch can put a strain on liquidity, earnings and even at times, solvency of the bank," the RBI had said in the Trends and Progress Report for 2012-13.

The other area of concern is pricing of long-term bonds that will be issued by banks for raising funds. "The market for long-term bonds is not that liquid. They are hardly traded. Pricing of those bonds, benchmarked to the corresponding government bond, is difficult," said the sources.