Take a bitter pill or risk junk rating for India: FM

Last Updated: Sat, Dec 15, 2012 04:41 hrs

Cautioning that India's sovereign ratings could be downgraded to junk if fiscal consolidation does not take place, Finance Minister P Chidambaram on Friday sought to prepare the country for some "bitter" pills and said more reform measures were in the pipeline. His statement came a day after the Cabinet took a slew of reform measures.

"If we do not succeed in fiscal consolidation, there is a risk of rating downgrade to junk status. We cannot afford that," Chidambaram said in his reply to a debate on the supplementary demand for grants for 2012-13 in the Lok Sabha.

He said some "bitter medicine" was necessary to restore the health of the economy and get back to high growth path. "This bitter medicine is good medicine. It will restore the health of the economy and next year we can look forward to much higher growth," he said.

Later, amid a walkout by the Bharatiya Janata Party (BJP) and the Trinamool Congress, the Lok Sabha passed the first batch of supplementary demands for grants that seek to raise government expenditure by Rs 32,120 crore in 2012-13.

Of the total outgo of Rs 30,804 crore, Rs 28,500 crore would be towards oil subsidy and Rs 2,000 crore for rehabilitating Air India.

Earlier this year, the government came out with a fiscal consolidation road map for five years, coinciding with the 12th Five Year Plan (2012-13 to 2016-17). According to the road map, the Centre's fiscal deficit target has been revised to 5.3 per cent of the gross domestic product (GDP) for this financial year against the 5.1 per cent pegged in the Budget. Till October, 68 per cent of even the revised target has been covered.

However, Economic Affairs Secretary Arvind Mayaram was hopeful of meeting the target. "5.3 per cent is the fiscal deficit target for this year. And, 5.3 per cent it shall be," he said on the sidelines of the Delhi Economic Conclave, organised by his department.

On yesterday's Cabinet decision to reduce the reserve price for telecom spectrum sale for 2G services by 30 per cent, he said, "I can't predict the market but we are hoping to optimise (spectrum auction). How much will come, I cannot say.... I'm quite confident companies will now bid more aggressively than they did (earlier)."

Standard & Poor's (S&P) and Fitch Ratings have warned India on downgrading its rating to junk. S&P had even said there was one out of three chances of the downgrade, since political gridlock makes it difficult to carry out fiscal reforms.

At the conclave, World Bank Chief Economist Kaushik Basu said he did not see any reason why India's ratings should be downgraded.

"India by no means is a prime candidate for downgrading in terms of rating, especially with these reforms now in the picture. If I were in-charge of a rating agency, India is definitely not in the category where you begin to worry about downgrading," he said on the sidelines of the event.

The Cabinet had yesterday cleared a slew of reforms like creating the Cabinet Committee on Investment to fast-track projects costing above Rs 1,000 crore stuck in clearances, amendments to the land acquisition Bill and a new investment policy for urea. Speaking at the Delhi Economic Conclave, Chidambaram said more reforms will be coming in a week to turn around the economy.

"I am confident that the steps we have taken - and some more steps that we will take in the next few weeks - will help turn the Indian economy around," he said.

But Sunil Kant Munjal, joint MD, Hero MotoCorp, said amendments to the land acquisition Bill would increase the cost of acquiring land by six-seven times, and lengthen the time by two-three times.

Chief Economic Advisor Raghuram Rajan said the government was reaching the limits on providing fiscal or monetary stimulus and the need of the hour was to improve investor confidence and create a better environment for achieving sustainable growth.

Chidambaram said it was too early to say whether the reforms undertaken by the government, including 51 per cent foreign direct investment (FDI) in multi-brand retail, had started yielding results but some signs of economic recovery were there.

He doled out statistics to buttress his points - manufacturing PMI rose to a five-month high in November, foreign portfolio capital inflows amounted to $21 billion up to November 30 this calendar year, the stock markets leading indices have risen about 11.5 per cent between August 1 and December 13.

But the finance minister did not mention 8.2 per cent increase in the Index of Industrial Production (IIP) in October, which he had described as the "green shoots" of recovery a few days ago.

Many analysts had said the IIP growth had come on the back of a low base effect of (-) 5 per cent expansion in October last year. Former RBI Governor Bimal Jalan did not totally buy the theory of base effect pushing up industrial growth, saying when the growth was down, then also it was a base effect.

Stressing the present challenge was different from the one faced in 2008, Chidambaram said, "The present challenge calls for bold and innovative measures."

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