A balance between fiscal consolidation and economic growth: S&P

01 March 2007

Standard & Poor''s Ratings Services today said that the budget announced by the Indian government (foreign currency BBB-/Stable/A-3; local currency BBB-/Stable/A-3) reflects ongoing efforts toward fiscal consolidation.

The fiscal 2007-2008 (ending March 31, 2008) budget targets a central government deficit of 3.4 per cent of GDP, after registering 3.7 per cent in fiscal 2006-2007. The expected reduction in the deficit keeps the government on a path to achieve the objectives set out under the Fiscal Responsibility and Budget Management Act 2003 (FRBM), among which is to reduce the budget deficit to 3.0 per cent by 2009. Continuing adherence to the fiscal targets set out in the FRBM remains a cornerstone in maintaining the sovereign''s creditworthiness.

A key challenge facing the government in the coming years will be its ability to balance the need for further fiscal consolidation with its pro-growth objectives. The Eleventh Plan, which begins in 2007-2008 and provides the framework for the latest budget and those in the next several years, aims to achieve a growth rate of about 10 per cent by 2012-2013.

Other challenges include the risk of increasing political pressure to spend in the run-up to national polls due in 2009 and the Sixth Pay Commission. Both of these factors could derail what has been steady progress in recent years on the fiscal front, with the deficit decreasing to its present levels from 5.9 per cent in 2002-2003.

The latest budget looks to have struck a balance between fiscal consolidation and the need to spend, especially in key areas such as agriculture, the rural economy, and social services. Expectations for continuing strong revenue growth, especially tax revenues, have allowed the government greater room to spur growth and reduce poverty.

The flexibility accorded by such revenue growth will be vital given ongoing spending pressures related to public investment, infrastructure, and the rural and social sectors. The latest budget, in which the government has increased its allocations for education and health by 34 per cent and 22 per cent, respectively, underlines such spending commitments.