Prime Minister Narendra Modi has made the job of the Budget team led by finance minister Arun Jaitley a lot easier now.
By stressing on the need of ?bitter medicine? to restore financial health, he has paved the way for taking tough measures that are likely to be announced in the Budget in July, especially on the expenditure control front including pruning of the subsidies in critical areas such as food, fertiliser and oil.
But this could just be the first step of a larger game-plan to bring growth back on track. Clearly outlining the government?s priorities ahead of the Budget may discomfort some segments but it will definitely help finance ministry in making a strong pitch for improving the country?s sovereign credit ratings by the international rating agencies.
A positive outlook by the rating agencies will just be the right dose for the spooked investor sentiment to recover. All the rating agencies are keeping a close watch on the fiscal and reform measures being planned by the new government which will have a bearing on the rating discussions this year.
Despite finance ministry?s charged efforts in the last two years to seek better ratings, the results have not been very encouraging, though it needs to be recognised that they could have been much worse.
India?s sovereign debt is rated by six major international agencies?Fitch Ratings, Moody?s Investors Service, Standard & Poor?s (S&P), Dominion Bond Rating Service (DBRS), Japanese Credit Rating Agency (JCRA), and Rating and Investment Information Inc,Tokyo (R&I).
The ratings assigned by these agencies after the annual reviews done in 2013 had been mixed, as shown in the chart. While the S&P retained negative outlook on India, the Moody?s Investor Service confirmed stable outlook. The time now is to build upon the work done earlier and the Prime Minister?s plain speak will certainly help, if followed by concerted action.
The specific areas of interest for the rating agencies include fiscal consolidation steps, efficiency of government spending and measures taken for improving the investment climate.
While fiscal consolidation measures have to be just taken forward, diesel price hike needs to be followed by steps to curtail LPG subsidy, and food and fertiliser subsidy must be brought down; it is the efficiency of government spending part which needs to be handled with a firm hand.
Many of the UPA flagship schemes need to be either scrapped or restructured at the earliest so that money could be released for better targeted and administered areas like creation of infrastructure facilities like irrigation, rail and roads.
The UPA flagship schemes have failed to deliver?during the five-year period 2007-12 alone, R7 lakh crore were spent on the 15 flagship schemes including MGNREGA, Pradhan Mantri Gram Sadak Yojana, Jawaharlal Nehru Urban Renewal Mission and other social sector programmes?and there is an urgent need to rework these schemes.
Though the allocations made in the interim Budget for various schemes is not changed normally in the full Budget, there have been enough indications in the air suggesting initiation of a complete overhaul of the central government spending mechanism beginning next month when Jaitley presents his maiden Budget in the Lok Sabha.
The tricky part, however, is improving the investment climate. This would require sustained effort. It is not easy to get retrospective tax amendments brought in 2012 to tackle Vodafone off the back.
The high-pitched transfer pricing (TP) adjustments will also not disappear till a mechanism is put in place to solve existing cases?the income-tax department has made R2.17 lakh crore worth of TP additions to the MNCs? income in the last six years. The finance minister on his part would do well to promise a non-adversarial tax regime to ensure an improved atmosphere.
With the long-term growth prospects still intact, if the new government succeeds in getting a thumbs up from the international rating agencies, that would be the real tonic for boosting investments.
santosh.tiwari@expressindia.com