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Bill to rein in fiscal deficit seen delayed

A bill to slash India's ballooning fiscal deficit is unlikely to win passage during this parliamentary session because committee members examining the measure need more time, a panel member said on Wednesday.

Analysts said the delay in approving the Fiscal Responsibility and Budget Management Bill could cast doubt on the government's resolve to curb the fiscal deficit and send the wrong signal to international financial ratings agencies.

Kirit Somaiya, a member of the parliamentary committee examining the legislation, said the panel needed more clarification on some provisions but gave no details.

"The bill is under discussion in the finance standing committee and it seems unlikely it will be approved in this session," he told Reuters.

The measure which aims to eliminate the government's revenue deficit within five years and cut the fiscal deficit to two per cent of GDP over the same period was introduced last December.

The bill also envisages a ban on government borrowings from the Reserve Bank of India but only after three years. Temporary borrowings or advances in response to cash shortages would be allowed under certain circumstances.

"It's very unfortunate the bill has been delayed. It was an important piece of legislation to restrain the government from overshooting its fiscal deficit," said D H Pai Panandikar, director general of the corporate think-tank RPG Foundation.

India's fiscal deficit was 5.2 per cent of gross domestic product in 2000-01, just above its target of 5.1 per cent, due to lower-than-expected tax revenues on the back of an economic slowdown.

But the combined figure along with fiscal deficits of state government and losses of state run firms is estimated at around nine to 10 per cent.

DEFICIT FALL KEY TO BOOSTING RATING

Without a fall in its fiscal deficit, there is little hope international rating agencies, which look at the combined fiscal deficit figure, will improve India's rating from its junk bond status, analysts said.

"It will have a negative impact on the government's resolve for fiscal consolidation and send wrong signals to international rating agencies," Sanjeet Singh at Bombay-based brokerage I-Sec told Reuters.

Any widening of the deficit would mean further deterioration in India's sub-investment grade sovereign rating.

The government has set a goal of reining in the fiscal deficit to 4.7 per cent of GDP this financial year.

"The delay could result in a higher fiscal deficit when revenues are coming down. The bill would have disciplined the government not to take the easy option of borrowing," said Panandikar.

India's revenue collections slumped in the first quarter of the current fiscal year ending June 30 to Rs 324.19 billion from Rs 372.17 billion.

The bill would have institutionalised the need to cut the deficit and force government to spend money ensuring maximum returns.

"On a medium- to long-term basis, if the delay continues, there will be upward pressure on rates due to the large fiscal deficit," Singh added.

Rates tend to go up when there are heavy government borrowings as there is more competition with industry for the same pool of funds.

In the current year too, the government has set its gross market borrowings at Rs 1.19 trillion of which it has mopped up around 54 per cent till now.

India's GDP grew by 5.2 per cent in 2000-01, down from 6.4 per cent and 6.6 per cent in the two preceding years.

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