Better fiscal situation could prevent rating downgrade: Economic Advisory Council

NEW DELHI: Prime Minister's Economic Advisory panel today said that definite signs of improvement in fiscal situation could dissuade global agencies from cutting India's sovereign rating.

"If we show definite signs of improvement in both these areas ( fiscal deficit and current account deficit), the rating agencies will have to take that into account.

"What is really needed is to show that we are moving towards the path of fiscal consolidation and containing CAD," Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said.

Agencies like Standard & Poor's and Fitch have warned of a ratings downgrade, citing, among other things, policy inaction and fiscal imbalance.

With the rising subsidy burden, the Centre's fiscal deficit ballooned to 5.76 per cent of GDP in 2011-12. In the current fiscal, the government expects to bring it down to 5.1 per cent.

"Given that ratings agencies are watching the situation, I think the budgeted fiscal deficit at 5.1 per cent is a non-negotiable issue," PMEAC Member M Govinda Rao said.

CAD, which was 4.2 per cent of GDP in 2011-12, has been projected at 3.6 per cent in the current fiscal. However, Rangarajan said the ideal level for CAD would be 2.5 per cent.

Referring to fiscal pressure, the PMEAC report said that as against the budget provision of Rs 43,580 crore towards fuel subsidy, Rs 70,000 crore more would be needed unless efforts were made to curtail the subsidy burden.

Rangarajan said that government's inability to raise diesel prices due to political reasons was adding to fiscal pressure and suggested hike in prices.

"I think we really need to get back to the path of fiscal consolidation. We must chalk out a new path of fiscal consolidation so that we can reduce the fiscal deficit. The CAD is also at a high level, so we need to address that also," Rangarajan said.

Concerned over the rising fiscal deficit, Finance Minister P Chidambaram had announced that government would take assistance of experts like Vijay Kelkar, Indira Rajaraman and Sanjiv Misra to draw a roadmap for fiscal consolidation.

The government, he had said, would soon unveil the roadmap and also made it clear that "burden of fiscal correction must be shared, fairly and equitably, by different classes of stakeholders. The poor must be protected and others must bear their fair share of burden".