"Although India's budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of a financial or commodity shock," said S&P's credit analyst Kim Eng Tan.
"Subsidy spending is one key source of weakness, despite fuel-subsidy reforms in 2014. Another constraint is the heavy government debt," he said in a report titled India's Fiscal Roadblocks Could Stall Infrastructure Progress.
The report said the government's budget deficit in India has fallen in recent years, relative to GDP. However, the latest year's deficit reduction didn't come easy. Disappointing tax collections, especially services tax collection, dragged estimated total revenue for the fiscal year ended March 2015 lower by 6.3% than the government's initial budget projection.The government had to cut spending by a similar proportion to check the widening budget shortfall. Since the subsidy bill was above expectations, the government made significant reductions in capital investments to bring spending down.
"The government's willingness to cut spending to rein in the budget deficit indicates the high priority of fiscal prudence on its agenda," said Tan. "From an institutional and governance point of view, this supports the sovereign credit rating on India [BBB-/Stable/A-3]. However, structural fiscal weaknesses continue to be vulnerabilities of Indian sovereign creditworthiness," he said.
The large interest payments and subsidy spending in budgetary expenditure are signs of fiscal risks because they leave little for the government to spend at its discretion, after necessary social services expenditure. The government's relatively small share of GDP that it collects as revenue further constrains financing of public infrastructure.
This is why public investment in India has been persistently lower than that of some other developing countries, S&P said. The government seems to have intent to change this. It has increased capital spending for 2015-16 by more than 25%, which is higher than the average 5.4% growth since 2011-2012.
According to S&P, an unexpectedly sharp increase in interest rates could still raise India's budgetary interest payments. Similarly, if food and fertilizer prices are markedly different from assumed levels, the subsidy bill could be larger than expected. In either scenario, particularly if divestment targets are also not met, the government could find it necessary to cut capital spending again to meet its deficit target.
via Business - Google News http://news.google.com/news/url?sa=t&fd=R&ct2=in&usg=AFQjCNH8AXtysAvPkQy2SQkkA7774_FVtg&clid=c3a7d30bb8a4878e06b80cf16b898331&cid=52778803825261&ei=3SEsVbCuFcGQ3gHAqoH4Bg&url=http://timesofindia.indiatimes.com/business/india-business/SP-warns-of-fiscal-hurdle-to-infra-push/articleshow/46912976.cms
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