India’s budget was criticized by Moody’s Investors Service and a Cabinet member resigned after a proposed train-fare rise stoked opposition, underscoring concern Prime Minister Manmohan Singh’s economic agenda is stalling.
Last week’s budget “lacks new solutions to address sovereign fiscal constraints” and confirms “significant fiscal slippage,” the ratings company said today. Railway Minister Dinesh Trivedi resigned after his proposal to increase train fares led to an outcry from Singh’s largest coalition partner.
Moody’s joins Fitch Ratings and Standard & Poor’s in citing public finances as hampering India’s credit rating, after the March 16 budget unveiled record borrowing needs to plug a budget gap estimated at 5.1 percent of gross domestic product next fiscal year. All-party cooperation is needed for difficult decisions to revive 9 percent growth, Singh said in parliament today, following a slowdown to 6.1 percent last quarter.
“For the next two years you are not going to get anything meaningful from economic decision-making which can be significant, substantial or remarkable in terms of helping the economy out,” said Jay Shankar, an economist at Religare Capital Markets Ltd. in Mumbai. “All the so-called non-popular decisions, they would be kept in cold storage.”
Benchmark government bonds slid after the budget. The yield on the 8.79 percent note due November 2021 has risen five basis points, or 0.05 percentage point, to 8.41 percent since March 15. The BSE India Sensitive Index closed 1.1 percent lower. The rupee weakened 0.1 percent to 50.2363 per dollar at 4:51 p.m. local time. It tumbled 16 percent last year, the worst performance in Asia, and has rebounded 5.8 percent in 2012.
India’s estimate of a budget gap of 5.9 percent of gross domestic product in the year through March, wider than the 4.6 percent target set a year ago, is credit negative, Moody’s said.
Trivedi resigned yesterday under pressure from his own party after proposing the rail-fare increase to improve Asia’s oldest network, highlighting how divisions within Singh’s ruling group have constrained efforts to push through policy changes.
In the budget, Finance Minister Pranab Mukherjee proposed to cap a subsidy program that spans diesel to fertilizers at less than 2 percent of GDP from 2012-2013 and raised service and excise taxes to 12 percent from 10 percent, seeking to rein in the widest fiscal deficit among major emerging economies.
While the subsidy cap would be positive for India, implementation risk is “high” ahead of the 2014 general election, Fitch Ratings said last week after the budget speech. Public finances have been “deteriorating and remain a key weakness” in India’s BBB- credit rating, Fitch said.
S&P, which ranks India’s bonds at BBB-, said the deficit target for the next fiscal year is “still quite high.” The shortfall is the “single-most constraining factor” in improving the country’s ratings, Takahira Ogawa, a Singapore-based director of sovereign ratings at S&P, said last week.
India’s foreign-currency credit rating at Moody’s is Baa3 with a stable outlook. Asia’s third-largest economy is rated at the lowest investment grade by Moody’s, Fitch and S&P.
A report today showed consumer-price inflation quickened in February to 8.83 percent as the cost of fuel, clothing and milk rose. The government projects 6.9 percent economic expansion in the year through March, the slowest pace since 2009, hurt by costlier credit and a slide in investment.
The Reserve Bank of India left its repurchase rate at 8.5 percent, the highest level since 2008, for a third straight meeting on March 15. It again signaled future cuts to bolster slowing growth, while flagging inflation risks including the fiscal deficit, oil prices and rupee deprecation.
While the tax rises announced in the budget may spur price pressures, it is “what is required for India” in the medium term, Finance Secretary R.S. Gujral said in New Delhi today.
The ruling Congress coalition is facing one of the most challenging periods since taking office in 2004.
Allegations of graft against officials, inflation and policy reversals have hindered Singh’s effort to preserve an economic turnaround that he helped begin as finance minister in the 1990s. Among the setbacks was the suspension in December of plans to open India’s retail industry to foreign companies such as Wal-Mart Stores Inc.