New Delhi: The Bharatiya Janata Party (BJP) which is the favourite to form the next government, is debating scrapping or revising a plan to cut the fiscal deficit, potentially risking a ratings downgrade, although that could be mitigated if economic growth recovers. Three sources close to the BJP said it was considering changes to the outgoing government’s fiscal strategy that envisages cutting the budget deficit to a nine-year low within three years.
If elected, the BJP would not be bound by the existing roadmap. Sticking to it would, though, minimise risks of a possible downgrade by ratings agencies. Being cut to “junk” from investment grade could drive up borrowing costs and trigger capital outflows in Asia’s third-largest economy.
India, among the so-called Fragile Five most vulnerable emerging market economies, saw its markets roiled by capital outflows from May to September last year as investors positioned for the Federal Reserve to taper monetary stimulus.
The current five-year fiscal plan, unveiled in 2012 by the Congress-led government, pledges to narrow the deficit to 3 per cent of gross domestic product (GDP) by March 2017. Outgoing finance minister P. Chidambaram had won a reprieve from the agencies by narrowing the deficit by 1.1 percentage points in the past two years, yet critics question the quality of fiscal consolidation.
Last year, Mr Chidambaram cut $13 billion in capital spending, deferred $16 billion in subsidies and squeezed $15 billion in dividends from state companies to lower the fiscal deficit to 4.6 percent in the fiscal year that just concluded.
“What he has done is creative accounting,” said a BJP economic adviser who spoke on condition of anonymity.
