Now, Bharatiya Janata Party debates junking fiscal deficit cut roadmap

May 15 2014, 18:50 IST
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The current five-year fiscal plan pledges to narrow the fiscal deficit to 3 pct of GDP by March 2017. Express Photo: Javed Raja The current five-year fiscal plan pledges to narrow the fiscal deficit to 3 pct of GDP by March 2017. Express Photo: Javed Raja
SummaryCurrent five-year fiscal plan pledges to narrow the fiscal deficit to 3 pct of GDP by March 2017.

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

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