Modi’s Pledge Tested With India Deficit at 99% of Target

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India’s budget deficit reached 99 percent of the full-year target in just eight months, raising doubts that Prime Minister Narendra Modi can keep a pledge to narrow the gap to a seven-year low.

Failure to meet the goal for a shortfall of 4.1 percent of gross domestic product would disappoint global investors who parked a record $26.4 billion in local debt in 2014, according to PNB Gilts Ltd. Nomura Holdings Inc. and IDBI Federal Life Insurance Co. say fiscal indiscipline may hold up rate cuts by the Reserve Bank of India, which has been pressuring the government to play its role in fixing the economy.

Governor Raghuram Rajan said Dec. 2 that “a change in the monetary policy stance is likely” in early 2015 should improvements in inflation and fiscal health continue. Modi has scrapped controls on diesel prices, raised natural gas tariffs and allowed more foreign investment in sectors such as defense since taking the reins of Asia’s third-largest economy in May.

“Fiscal consolidation will certainly have a bearing on the central bank’s rate decision,” Sri Prasad Prabhu, the head of fixed-income at IDBI Federal in Mumbai, said in an e-mail interview on Jan. 1. “Bonds may give up some gains if the fiscal weakness persists.”

The shortfall in government finances reached 5.25 trillion rupees ($82.6 billion) in the eight months ended November, official figures showed last week, compared with a goal of 5.31 trillion rupees for the year through March 2015.

Government Efforts

A tax revenue shortage makes it difficult to shrink the budget gap from 4.5 percent of GDP last fiscal year, Finance Minister Arun Jaitley said in November, as growth in the $1.9 trillion economy slowed in the July-September period for the first time in three quarters. The government last week raised taxes on gasoline and diesel, and decided against extending a tax break for the local automobile industry.

While the Modi administration has taken short-term spending cuts, it has met less than 5 percent of its budget estimate to raise 434.25 billion rupees from sales of holdings in state-run companies this fiscal year. Nomura says even if disinvestment picks up, the government will have to resort to sharp expenditure cuts and seek higher dividends from state-run firms to meet the 4.1 percent target.

Modi’s government expects to fetch 160 billion rupees by selling some telecommunications airwaves before March 31, it said in a statement on Jan. 5.

Rate Pause

“There’s a risk the quality of fiscal consolidation will likely suffer,” said Sonal Varma, a Mumbai-based economist at Nomura, who doesn’t expect a rate cut before April. “If the quality of consolidation is not encouraging, then the chances and the quantum of RBI’s monetary easing will be called into question.”

The central bank will have more confidence that the government is meeting its fiscal targets next year, Rajan told analysts on Dec. 2. He left the repurchase rate unchanged at 8 percent for a fifth straight meeting that day even as plunging oil prices improved the inflation outlook for India, which imports about 80 percent of its oil.

Data mid-December showed the consumer price index rose 4.38 percent in November, the least since the gauge was created in January 2012, intensifying calls for easing. Brent crude sank 48 percent in 2014, the most since 2008.

The yield on India’s current benchmark 10-year bonds due July 2024 has risen three basis points, or 0.03 percentage point, since the budget deficit figures were announced on Dec. 31. The Indian rupee has weakened 0.8 percent to 63.55 a dollar in the period.

Foreign funds pared their holdings of rupee-denominated government and corporate bonds by $51.7 million last week, according to exchange data.

“Markets are uncertain about the deficit target,” Vijay Sharma, executive vice president for fixed income at PNB Gilts in New Delhi, said in a phone interview yesterday. “When there is uncertainty, the tendency is to sell.”