PM advisory panel raises doubts over S&P's move

After the Ministry of Finance, the Prime Minister’s Economic Advisory Council has raised questions over the global credit rating agency Standard and Poor’s move to downgrade the outlook on India’s long-term credit rating on the ground of rising fiscal deficit.

“When other economies are going into recession, India is growing. In this type of situation, return on investment (in India) is expected to be reasonable, in which case I don’t understand the downgrading of the outlook,” PM’s Economic Advisory Council Chairman Suresh Tendulkar told PTI.

When pointed out that the stimulus provided by India is widening the fiscal deficit which prompted S&P’s to cut the outlook, he said, “Fiscal deficit being large is not something which one should be worried about in the current context. I basically see that even other economies are also doing that.”

On February 24, S&P’s had downgraded outlook on India’s long-term sovereign rating from stable to negative, which may erode the faith of investors in Indian economy.

“The outlook revision reflects our view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term,” S&P’s had said.

Late last month, the finance ministry had asked S&P’s to explain the rationale behind downgrading the outlook, while pointing out that outlook for other nations whose fiscal deficit too have risen were left unchanged.

A letter by the ministry to the rating agency had said it was a conscious decision of the government to provide stimulus packages to industry, reeling under global financial meltdown, which has led to increase in fiscal deficit.

The only alternative was not to provide stimulus packages, which could have adverse impact on India’s economy in the medium term, and would have been more dangerous than increase in fiscal deficit, the ministry had said.

The letter also stated that there are a number of countries whose fiscal deficits have also risen, but their outlooks have been retained, according to sources.

India’s fiscal deficit was revised upward to 6 per cent of GDP for 2008-09 against 3 per cent envisaged under the Fiscal Responsibility and Budget Management (FRBM) Act and 2.5 per cent estimated earlier.

For 2009-10, fiscal deficit is projected at 5.5 per cent of GDP.

Tendulkar said he supports FRBM like restrictions on fiscal deficit.

The government provided three stimulus packages to industry by reducing excise duty by 6 per cent, service tax by 2 per cent, raising planned expenditure and allowing infrastructure refinance company IIFCL to raise funds through tax-free bonds, among other things.

However, these packages have so far failed to boost the industry with factory production again contracting by 1.2 per cent in February.