India's FY14 budget (which begins 1 April 2013) unveiled Thursday is consistent with the fiscal and economic policy direction of recent months and reiterates the government's commitment to the fiscal consolidation targets it set out last year. With elections due in little more than a year, this remains encouraging. However, Fitch Ratings believes policy execution will be challenging, and India's public finances are vulnerable to any further slowdown in economic growth.
India's FY13 budget deficit came in at 5.2% of GDP, below the revised target of 5.3%, and Finance Minister P Chidambaram said he is sticking to his FY14 target of 4.8%. Thus the government is sticking to the Kelkar Committee's fiscal roadmap that it adopted in September.
An initial assessment of the budget shows a focus on revenue raising measures, for example the 10% tax surcharge on those earning more than INR10m, rather than spending cuts which would arguably be a more certain way of hitting the FY14 deficit target. Total expenditure will increase to INR16.7 trillion in FY14 from an estimated INR14.3 trillion this year.
Considering India's position in the electoral cycle, we did not expect significant additional expenditure cuts in the budget on top of the important measures already announced in H212 and Q113, such as fuel subsidy reform. Nevertheless, the emphasis on revenue-raising via tweaks to taxation rates, rather than cutting spending, illustrates the difficult balancing act that policymakers face between political imperatives and fiscal rebalancing as elections draw closer.
Meanwhile, the continuing failure to reform taxation (for example by introducing a goods and services tax), and the cost of food security under the National Food Security Bill, mean that structural as well as cyclical pressures continue to weigh on the public finances.
Key implementation risks to the government's policies are, firstly, whether subsidy reform delivers significant savings. This will partly be driven by external factors (commodity prices) as well as the government's ability and willingness to stick to its proposed subsidy limits. Subsidy costs in FY13 were 2.6% of GDP and the government is targeting 2% of GDP in FY14.
A second risk is the reliance on uncertain proceeds of proposed privatisation, projected in the budget at INR558bn. Privatisation proceeds have fallen short of expectations in the past.
The third key risk is GDP growth. India's economic outlook remains uncertain, both due to global developments and to domestic policy constraints with high inflation constraining monetary policy. The Central Statistics Office said Thursday that Indian GDP rose 4.5% in Q412 from a year earlier, lower than was generally expected.
While the authorities are aiming to improve India's public finances, successful implementation and the impact on trend growth, combined with how India's macroeconomic outlook develops more broadly over time, will be key drivers of India's sovereign credit profile.
We rate India 'BBB-' with a Negative Outlook.