Can't figure it away
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In addition, a large fiscal deficit could cause a ratings downgrade for India. This would increase the cost of borrowing by Indian companies abroad. Domestic credit growth has declined. Banks are reluctant to lend because their own balance sheets are not looking healthy. External financing is relatively cheaper, but only so far as the credit rating is good and the rupee is not expected to depreciate. Both these require the fiscal deficit to remain low.
A slightly higher denominator in the budget deficit to GDP ratio may appear good in the immediate context. But if the health of India's fiscal condition does not improve, no one is going to be fooled for long. The difficulty may get worse if the current account balance does not improve. Instead of focusing on how to defer the bad news, the government needs to focus on how it will actually do a fiscal correction. If the government is going to introduce the Food Security Act, there should be a clear indication of what it means for this year's and the following year's government expenditure. Unless such careful analysis is done of various government programmes, no amount of relatively good news obtained by arguing over GDP figures is going to convince any investor that India is worth the risk.
The writer, professor at the National Institute of Public Finance and Policy, Delhi, is consulting editor for 'The Indian Express'
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