Standard & Poor’s sounds alarm on Govt’s fiscal pressures

At a time when Prime Minister Narendra Modi is hard-selling the India story to global investors, industry observers and rating agencies are saying that the Government needs to do much more if it wants to see big money flowing into the country.

On Monday, Standard & Poor’s Ratings Services said that without further fiscal reforms, the government may find it difficult to sustain the increase in public investments.

“Although India’s budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of a financial or commodity shock. Subsidy spending is one key source of weakness, despite fuel-subsidy reforms in 2014,” said Standard & Poor’s credit analyst Kim Eng Tan in a report titled ‘India’s Fiscal Roadblocks Could Stall Infrastructure Progress’.

Govt debt Another constraint is the heavy government debt; the report notes that though the Centre’s Budget deficit has fallen in recent years, the latest deficit reduction didn’t come easy.

“Disappointing tax collections, especially service tax collection, dragged estimated total revenue 6.3 per cent below the central government’s initial Budget projection for the fiscal year ended March 2015. The government had to cut spending by a similar proportion to prevent the Budget shortfall from widening. Since the subsidy bill came in above expectations, the government made significant cuts to capital investments to bring spending down,” the report said.

Voicing concerns Last week several corporate leaders raised concerns over policy making. Marico Chairman Harsh Mariwala aired his views on Twitter last Tuesday. “Sheen is falling of Modi govt in the context of promises, and gradual delivery. Need to move fast,” he wrote.

India Inc is worried because the Centre’s assurances on investment friendly policies are not translating into higher revenues. Crisil Research last week said that it expects India Inc’s revenue growth to slip to a 7-quarter low of 2.5 per cent on a year-on-year basis in the March 2015 quarter.

But by and large there is still cautious optimism.

Last week, Moody’s changed its rating outlook for India to ‘positive’, with the possibility of an upgrade in the next 12-18 months. Fitch kept its rating outlook at ‘stable.’

S&P said that structural fiscal weaknesses continue to weigh down Indian sovereign creditworthiness, though it acknowledged the Centre’s willingness to cut spending to rein in the Budget deficit.

The big worry of S&P is if food and fertiliser prices are markedly different from assumed levels, the subsidy bill could be larger than expected. “In either scenario, particularly if divestment targets are also not met, the government could find it necessary to cut capital spending again to meet its deficit target,” it said.

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