September 24, 2012
India’s “rush of reforms” – comprising a cut in diesel fuel subsidies, sale of government stakes in SOEs, and relaxation of FDI rules in the aviation and retail sectors – was aimed at containing the fiscal deficit in order to bolster sovereign creditworthiness.
The reforms are necessary but will be difficult to implement in full. India has been going through a rough patch with growth slowing more sharply than expected. Real GDP growth for FY12/13 is now likely to come in at 6% yoy at best, down from 6.9% in FY11/12 and a sharp drop from 9.6% in FY10/11. This has posed many challenges to keeping a budget target of a fiscal deficit at 5.1% of GDP. The immediate challenges are risks of roll-back and then execution risks. A rapid political backlash occurred when the Trinamool Congress (TMC), the ruling coalition’s 2nd largest party, announced it was withdrawing from the government. While the coalition is not facing an immediate threat of collapse, it is now more vulnerable. If other parties follow TMC’s move, the Congress Party will be forced to consider partial roll-backs. In addition, the past record of government divestment of SOEs suggests there are execution risks and that revenue may disappoint.
All in all, the push for reform is commendable and should go some way to helping fiscal consolidation. While the defined fiscal target of 5.1% may not necessarily be achieved, the overshoot should not be as large as in FY 11/12.
© Copyright 2013. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.
In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.
14.06.2013
