Moody?s assessment of the Indian Budget as credit negative on Monday essentially raises the same concerns on the fiscal roadmap that the RBI Board of Governors raised with the finance minister, on the same day. The fiscal plan of the finance minister looks fine on a three-year time frame; it is the short run that looks wobbly. He has set a new timetable for the amended Fiscal Responsibility and Budget Management Act with a terminal year of March 2015. By that date the government expects the revenue deficit to be 2% of the GDP from the current 4.4%. The newly-coined effective revenue deficit will be zero by then. These are softer targets for the government than the previous fiscal responsibility Act, especially as the critical debt-to-GDP ratio has been removed from the Bill. Still, as goalposts, these are something that the economy needed. Of course, the three-year rolling target is not new; it just shows the finance minister?s ability to pick up nuggets from the Budget and present them in a new light.
The problem is with the fiscal math for 2012-13 that the ministry is asking the rest of the world to believe in. Judging by the statement issued after the meeting, the RBI Governor has concerns on the fiscal consolidation. Mukherjee is reported to have said the Board should accept the path laid out as credible. But as the Moody?s report points out, unless the government can show how it will raise diesel and even petrol prices and cut fertiliser subsidies, the road to perdition is still open. For the finance minister to do all this through a fractured polity and most important before RBI meets in April to decide on a rate cut will be extremely difficult. The more the corrections are postponed for later in the year, the less will the finance minister have a chance to make the necessary corrections. Delays have not improved decision-making in these spheres. The reason for writing in the optimistic fiscal numbers in the Budget is to create a platform for the economy to benefit from a lower deficit, which would imply a lower borrowing cost. Else, the Budget risks becoming a non-event in the ensuing fiscal.
