New Delhi: The finance ministry has dropped its plans to amend or replace the Fiscal Responsibility & Budgetary Management (FRBM) Act of 2004, which laid down fiscal and revenue deficit targets until 2008-09.
The ministry has breathing space until next year before making any fresh commitments, as the government has already set medium-term targets in this year's Budget. This means it will not run the risk of breaching parliamentary propriety despite the dramatic overshooting of the targets under the Act.
"We have already indicated a road map for fiscal consolidation in the Union Budget. The Act prescribes a statement by the finance minister in Parliament if the targets are breached. This is already being done, so a new Act is not necessary," a senior government official told FE.
Finance minister Pranab Mukherjee's Budget estimate for the 2009-10 fiscal deficit is 6.8% of GDP. The minister aims to reduce this to 5.5% next year and to 4% in 2011-12. Bond markets can, therefore, expect another sizable tranche of government borrowing next year, which the finance ministry feels would be necessary to haul India back on an 8% rate of GDP growth. It has raised borrowings by 51% this year over 2008-09.
The finance ministry has conveyed its latest stance to the 13th Finance Commission, which is working on a plan for fiscal consolidation from 2010 through 2015. "A final decision on the need to amend the FRBM law will only be taken after formal consultations with the Commission," the official said.
With its ballooning deficit, economists and rating bodies have been waiting for India to come out with a revised fiscal road map before analysing its growth prospects. Post-Budget, global rating agencies Moody's Investors Service and Standard & Poor's expressed concern about the state of government finances and were closely monitoring Mukherjee's plan to trim the deficit before revising India's credit rating.
S&P places India's long-term local currency rating at BBB-, the lowest investment grade level, and could reduce the rating to junk if the deficit isn't narrowed. Moody's assigns India a rating of Ba2, two levels below investment grade.
"Given India's very high public debt and public sector claim on resources, it would be advisable to shift the focus to the long-term fiscal agenda in 2010-11 and move decisively towards fiscal consolidation," said Kalpana Kochhar, deputy director (Asia & Pacific) and mission chief for India at the International Monetary Fund.
"We welcome the finance minister's...