We will have to wait a bit to find out if the threatened downgrade of India?s rating happens in September. But if the government wants to avert it, it will be of help if it does not repeat the pattern of making promises to agencies and then acting surprised when the promises do not hold.
In April, when some of these agencies came to the finance ministry to figure out if the 5.1% fiscal deficit will hold, the officials told them a strange story. They were told the combined might of the then finance minister and the Prime Minister had assured them that diesel prices would be revised by at least R5, kerosene would be decontrolled and a cap put on subsidised LPG by May 15. The officers were told the government would implement the measure no later than this date. Based on this ?solemn assurance?, the budget team figured out there was no need to provide for more than R43,000 crore as the government?s share for the under-recovery by the public sector oil marketing companies.
This was done despite the clear understanding that, at $115 a barrel, the total bill for the year would be over R1,05,000 crore. The gap was to be broken up into a R32,000 crore additional realisation from the price hike of petro products and another Rs 30,000 crore from savings in plan expenditure.
The last bit might sound preposterous to those unfamiliar with the working of the Indian government, but it is true. Essentially, no department manages to start work on projects as soon as the funds are sanctioned. So, the plan money for the year invariably shows a surplus through most of the year. In 2010-11, for instance, the last year for which audited figures are available, about 25% of the fund was spent in the last two months, of which about 15% was spent on the last day of the year.
The arithmetic behind the impressive fiscal deficit was, therefore, to juggle the R14,90,925 crore of cash flows through the year and to hell with actual management of the investment programmes.
Since the oil bill is usually divided into three instalments payable in each quarter of the year, with the last one usually paid in the first quarter of the next year, the finance team calculated that it would be easy to keep the numbers under control for the year. This means the government was planning to pay out about Rs 35,000 in two tranches in September 2012 and in early January 2013, and carry over the balance into the next year. Among all the statistics in the budget papers for this year, this was the sanctum sanctorum around which the rest of the numbers were built. It had to hold, if the budget had any chance of holding together.
The rating agencies, however, reacted differently. S&P, it seems, did not buy the argument and proceeded to cut the India ratings to negative in April itself. Moody?s and Fitch waited out, but by June midweek, all of them were obviously convinced this juggle, or whatever you may want to call it, was over. This also explains why on June 11 the S&P update was so sharp on the political management. Because the Indian government had told them in so many words why it couldn?t afford to do anything with oil prices till mid-May and then would promptly make amends. Days later, Fitch too proceeded to cut the outlook and Moody?s came near.
The numbers going out of sync also mean that the market borrowing plan of the government has been disturbed. There are now two calls that RBI will have to take this month. The first is more routine, it has to issue a calendar for the government borrowing in the second half of the year. But the tough one will be the second call. To wit, whether to go in for additional borrowing over what the finance ministry had budgeted for in this fiscal.
The decision, one supposes, will become clear on the basis of the Vijay Kelkar report due in the finance ministry this week.
Irrespective of the decisions from this September, there is no doubt that the government had not only mismanaged the political environment in an unending drama, it had also given out pretty askew projections to the world at large. So, in June and July when the finance ministry and the rest of the government feigned surprise at the actions that cost some increase in the borrowing costs for India Inc, there was no surprise. The protestations about how UIDAI and other measures will ultimately bring the oil bill for the economy down were not relevant in this context.
The result of the wrong projections is that it will take time for the rating agencies and all else to become convinced that the Indian government is not crying wolf, when it makes an assessment of its fiscal position, the next time. The credit ratings will follow accordingly.
subhomoy.bhattacharjee@expressindia.com