While the finance minister announced various fiscal reforms, S&P feels that the timing of the implementation of key reform measures such as the Goods and Services Tax (GST), Direct Tax Codes (DTC) and the targeted direct subsidy disbursement remains uncertain.
Standard & Poor's said that India's budget for the fiscal year ending March 31, 2013, would be mildly negative for the unsolicited sovereign credit rating on India (BBB-/Stable/A-3). While the finance minister announced various fiscal reforms, it feels that the timing of the implementation of key reform measures such as the Goods and Services Tax (GST), Direct Tax Codes (DTC), and the targeted direct subsidy disbursement remain uncertain. In addition, India's deficit in the next fiscal year is likely to remain high, and uncertainty surrounds the path to subsidy consolidation and to lowering fiscal vulnerability to volatile commodity prices.
S&P believes that India's nominal GDP growth will most probably exceed the ratio of general government deficits to GDP in the coming fiscal year. It expects India's debt-to-GDP ratio to fall to 74.7% in 2012-2013 from 74.9% in 2011-2012. However, large government funding programs, with announced new market borrowing of Indian rupee (INR) 4.8 trillion, will put some pressure on the financial market. This could adversely affect economic recovery. India's weak fiscal position and large debt burden are some of the most significant constraining factors on India’s sovereign credit rating.
According to the budget, India's fiscal deficit will be 5.1% of GDP in fiscal 2012-2013, compared with 5.9% of GDP in the current fiscal year (2011-2012). Both metrics fall short of the 13th financial commission's fiscal consolidation targets of 4.2% of GDP in the coming fiscal year and 4.8% of GDP in the current fiscal year. The ratios are also lower than the government's targets in its five-year plan of 4.1% in fiscal 2012-2013 and 4.6% in fiscal 2011-2012.
With a general election likely in 2014, it believes that the chances of India achieving a central government deficit target of 3.0% of GDP for fiscals 2013-2014 and 2014-2015 seem remote. The rating agency expects the deficit in the general government budget (including local governments) to remain high at about 8% in the coming fiscal year, compared with about 8.5% in the current fiscal year.
Potential risk surrounds the government's target divestment of INR300 billion in the next fiscal year. Volatility in the capital markets might lead to lower-than-expected proceeds from divestments. The government's significantly smaller revised estimate of INR155 billion in divestment proceeds for the current fiscal year compared with its original budget of INR400 billion illustrates this risk.
The finance minister announced a policy to reduce the total size of subsidies to 2% of GDP in fiscal 2012-2013, and to further bring down subsidies to about 1.75% of GDP in three years. The success of such policies depends on the pace and extent of subsidy reforms and the international and domestic prices of the subsidized commodities, expects S&P. The gap between domestic and international petroleum prices is narrowing. But subsidies are still large because the domestic prices of diesel, liquefied petroleum gas (LPG) and kerosene are lower than market prices globally. The government lowered the budget for fuel subsidies to INR436 billion in 2012-2013 from INR685 billion in 2011-2012. However, overall subsidies might be higher than budgeted in the absence of effective policy implementation to control prices–mainly of kerosene and LPG.
In early March, the union cabinet approved a 20%-25% reduction in non-urea fertilizer subsidies. This is a part of the fertilizer subsidy reforms that are slowly taking place. However, even if the measure is implemented, S&P believes that the impact on the reduction of imports and the decline in total subsidies will depend on the size of consumption in the coming fiscal year, despite non-urea fertilizers being imported.
FM announced an amendment of the Fiscal Management and Budget Responsibility Act, 2003 (FRBM), which was suspended in March 2009. Depending on what the Act will cover, S&P expects that the amended FRBM to enhance investors' confidence in the government's commitment to fiscal consolidation.
The absence of a specific date for GST implementation was in line with its expectation. However, the government has made some changes to the tax structure and tax rates to ease GST introduction. For example, it hiked the service tax and the standard duty rates to 12% from 10%. Simultaneously, the government has moved most services to the positive list (indicating that in principle they will be taxed) from the negative list (which is not taxed). FM also announced an increase in the customs duty on gold to 4% from 2%, and a hike in the excise duty on luxury cars to 24% from 22%, to reduce the pace of unproductive imports.
