With varying degrees of severity, Fitch, Moody's and Standard & Poor's all expressed worries that Finance Minister Arun Jaitley's pledge to keep this year's fiscal deficit to 4.1 percent of gross domestic product looked unrealistic.

While the budget unveiled a number of measures to attract foreign investment, Jaitley's revenue and growth numbers were predicated on a major revival in private investment across the economy.

The Finance Minister seemed to recognise the risks to his own forecasts in an interview he gave to the state broadcaster Doordarshan after the budget speech, saying the deficit target was a challenge that he had accepted with a caveat.

"I have told the people that revenues are low, the monsoon is not extremely bright this time - the prospects therefore this is a challenging task," Jaitley said.

"I am accepting the challenge and I will endeavour," he said.

Agency's Negative Outlook

 

Standard & Poor's

Standard & Poor’s said that the sovereign debt of Asia's third largest economy could be rated ‘junk’ within a year if the government fails to revive low economic growth.

Prior to Thursday's budget announcement, Jaitley and Modi had created expectations of tough reform with warnings of "bitter medicine" and broadsides against "mindless populism". So there was some surprise that the budget chose not to rein in the subsidy bill that drives up the deficit.

"Modi promised a bitter pill, but Jaitley preferred to make it sweet," said BB Bhattacharya, a prominent economist.

Moody's

Moody's Investors Service welcomed Jaitley’s pledge to keep government finances in check but said the lack of details on how to narrow the fiscal deficit made it challenging to assess the credit impact.

Atsi Sheth, Moody's sovereign rating analyst, said, "The Finance Minister did say that we want to reduce fuel and food subsidies but how exactly that will happen was not clear in this budget statement."

"From a ratings perspective, it is mildly positive to see there is a roadmap but the lack of details gives us pause," Sheth said.

"The intent appears to be there, but the measures have not been really thought through yet," Sheth added.

Moody's currently rates India at ‘Baa3’, the lowest investment-grade rating, with a ‘stable’ outlook.
Sheth added the fiscal deficit target could also be hard to achieve.

"If growth does not revive in the second half of the year, then I do think either they will have to be a very concerted effort at expenditure reduction or it will be missed by a couple of decimal points," Sheth said.

Fitch

Fitch Ratings called India's budget ‘constructive’ for its sovereign rating but said that implementation will be key and noted it was unsure how the fiscal deficit target of 4.1 percent could be achieved without revenue increases or spending cuts.

"The overarching point of the Indian government's budget announcement is that the rhetoric and targets are credit constructive in many areas," Andrew Colquhoun, Head of Asia-Pacific Sovereigns Group at Fitch, said in an e-mailed comment.

Colquhoun also expressed surprise over the government sticking to a 4.1 percent fiscal deficit target, noting it estimated the measures announced on Thursday would actually reduce revenues by a net 0.1 percent to 0.2 percent of GDP.

"The agency (Fitch) is currently unsure how this (fiscal deficit) can be met without further revenue strengthening or expenditure-saving measures," Colquhoun wrote.

"Fitch has a more cautious projection on divestment proceeds than the budget. It remains to be seen how the government would react to a shortfall in tax or divestment revenues, if it occurred,” Colquhoun said.

Fitch holds "BBB-minus" rating with a "stable" outlook for India.

What market thinks about General Budget?
Fitch, Moody's and Standard & Poor's- all expressed worries that FM Jaitley's pledge to keep this year's fiscal deficit to 4.1 percent of GDP looked unrealistic.
S&P said that the sovereign debt of Asia's third largest economy could be rated ‘junk’ within a year if the government fails to revive low economic growth.
Many market watchers think Jaitley missed an opportunity - both to take a tough stance on subsidies and to create headroom for greater infrastructure spending.
An electrifying election campaign by avowed modernizer Modi, followed by his landslide victory on May 16 triggered repeated record highs on India's stock exchanges.

Optimistic target

Jaitley, who worked closely with Modi to draw up a budget they see as a blueprint for future growth, based his deficit calculations on 19 percent increase in tax revenue - an optimistic target given his decision to offer tax breaks to middle-class Indians.

If growth doesn't revive in the second half of the year ending March 2015, then there will have to be a "very concerted effort at expenditure reduction" or the fiscal deficit target will be "missed by a couple of decimal points", Sheth said.

Many market watchers think Jaitley missed an opportunity - both to take a tough stance on subsidies while the government's political stock is high at the start of its five-year term, and to create headroom for greater infrastructure spending.

Jaitley was widely expected to scrap 4.1 percent fiscal deficit target set by his predecessor, who left a stack of bills he owed to state oil companies for unpaid subsidies. These have already eaten up almost half of the targeted deficit this fiscal year.

A day before the budget, DK Joshi, principal economist at the Indian arm of S&P's, CRISIL, said he thought a target of 4.5 percent of GDP was more credible.

Reviving investment

Given its tight spending obligations, the government has increased its reliance on the private sector to revive growth, betting on public-private partnerships (PPPs) to expand the railways, gas pipelines, airports and roads.

"The investment cycle is something you can't just switch on overnight," R Shankar Raman, chief financial officer at Larsen & Toubro, said.

Raman, whose company builds urban metro trains, engineering equipment and military equipment, said budget measures to allow more foreign investment in defence and a focus on infrastructure would help but said the government's overall increase in capital expenditure was low.

"Understandably so. Where are they going to get the money from?...... My sense is the larger allocation will come in the 2015/16 budget," Raman said.

An electrifying election campaign by Modi, followed by his landslide victory on May 16 triggered repeated record highs on India's stock exchanges. The rally seems to have ended, at least temporarily, with the Nifty down 3.8 percent this week, its biggest weekly loss in over nine months.

JPN/Agencies

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