September 24, 2012
India’s “rush of reforms” – comprising a cut in diesel fuel subsidies, sale of government stakes in SOEs, and relaxation of FDI rules in the aviation and retail sectors – was aimed at containing the fiscal deficit in order to bolster sovereign creditworthiness.
The reforms are necessary but will be difficult to implement in full. India has been going through a rough patch with growth slowing more sharply than expected. Real GDP growth for FY12/13 is now likely to come in at 6% yoy at best, down from 6.9% in FY11/12 and a sharp drop from 9.6% in FY10/11. This has posed many challenges to keeping a budget target of a fiscal deficit at 5.1% of GDP. The immediate challenges are risks of roll-back and then execution risks. A rapid political backlash occurred when the Trinamool Congress (TMC), the ruling coalition’s 2nd largest party, announced it was withdrawing from the government. While the coalition is not facing an immediate threat of collapse, it is now more vulnerable. If other parties follow TMC’s move, the Congress Party will be forced to consider partial roll-backs. In addition, the past record of government divestment of SOEs suggests there are execution risks and that revenue may disappoint.
All in all, the push for reform is commendable and should go some way to helping fiscal consolidation. While the defined fiscal target of 5.1% may not necessarily be achieved, the overshoot should not be as large as in FY 11/12.
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