Biggest Budget Miss Since 2009 Hurts Confidence: India Credit

By V. Ramakrishnan, Kartik Goyal and Jeanette Rodrigues - Mar 19, 2012

Indian Finance Minister Pranab Mukherjee missed his budget-deficit target by the most in three years and announced a 12 percent increase in debt sales, sending bond yields to a two-month high.

The shortfall in finances in the year ending March will be 5.9 percent of gross domestic product, 1.3 percentage points more than the goal, Mukherjee said in a March 16 speech in parliament. That was the biggest margin of failure since falling short of the aim by 3.5 percentage points in the 12 months through March 2009, the height of the global financial crisis.

Goldman Sachs Asset Management Ltd. and FIM Asset Management Ltd. said the budget didn’t do enough to restore the credibility of Mukherjee, who pledged to cut the deficit to 5.1 percent of GDP in the 12 months starting April. The yield on 10- year bonds had the biggest weekly increase since January to 8.43 percent last week, compared with 3.55 percent in China, where the 2012 deficit was 1.5 percent of GDP.

“There is nothing in this budget that’s going to make people believe that India is now on a more credible long-term fiscal path,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an interview to Bloomberg UTV on March 16. “Some of the concerns and risks that many people would have had before the budget, stay in place.”

India missed its deficit target three times in the last 10 years. Mukherjee fell short of his revenue goal for the current fiscal year as economic growth slowed and the government met only 35 percent of a program to raise 400 billion rupees ($8 billion) by selling state assets. Asia’s third-largest economy is likely to grow 6.9 percent in the year through March, the least in three years, Mukherjee told parliament.
Rating Constrained

Standard & Poor’s, which ranks India’s bonds at BBB-, the lowest investment grade, said the deficit target for the next fiscal year is “still quite high.” The shortfall has been the “single-most constraining factor” in improving the country’s ratings, Takahira Ogawa, a Singapore-based director of sovereign ratings at S&P, said in an interview on March 16.

The finance ministry plans to sell a record 5.69 trillion rupees of debt the next fiscal year, compared with 5.1 trillion rupees in the 12 months ending March 31. Underwriters had to buy unsold bonds at nine auctions this fiscal year, central bank data show, signaling demand didn’t match supply of notes. The government will set the first-half borrowing target on March 23, Shaktikanta Das, additional secretary in the ministry, said on March 16.

Yields on 10-year (GIND10YR) sovereign debt jumped 14 basis points, 0.14 percentage point, last week after data on the website of the Controller General of Accounts showed India’s budget gap widened to 4.35 trillion rupees in the 10 months through January, exceeding the full-year target of 4.13 trillion rupees. A year earlier, the shortfall was 58.3 percent of the annual goal.
‘Always Overspends’

“I doubt they can achieve the fiscal-deficit target,” Robert Prior-Wandesforde, a Singapore-based director of Asian economics at Credit Suisse Group AG, said in an interview on March 16. “We know from history that the government always overspends relative to its targets.”

The shortfall will reach 5.8 percent of GDP in the year starting April, he predicts. The finance ministry has exceeded its budgeted spending target in eight of the last 10 years, according to government data.

The yield on the 8.79 percent note due November 2021 fell one basis point today after climbing seven basis points on March 16. The extra yield investors seek to hold the notes instead of U.S. Treasuries has rebounded 11 basis points from an eight- month low of 601 reached on March 14, data compiled by Bloomberg show.
Spectrum Sale

Rupee-denominated bonds handed investors a loss of 0.3 percent in March, compared with a 0.2 percent return on yuan notes, according to indexes compiled by HSBC Holdings Plc. India’s revenue collection was 69.5 percent of the full-year target in the 10 months through January, compared with 92.2 percent a year earlier, official data showed this month. The rupee advanced 0.2 percent today to 50.0885 per dollar after declining 0.7 percent last week, according to data compiled by Bloomberg.

India may cut the fiscal deficit more than budgeted, benefiting from the sale of telecom spectrum, according to Gordon Rodrigues, an investment director at HSBC Global Asset Management, a unit of Europe’s biggest bank that oversees $25 billion of Asian fixed-income assets. The spectrum sales may earn India 400 billion rupees in the year starting April 1, R. Gopalan, the top bureaucrat in the department of economic affairs at the Ministry of Finance, said on March 16.

“The budget measures are a move in the right direction in terms of the fiscal deficit,” Hong Kong-based Rodrigues said in an interview on March 16. “There is a possibility the government may actually do better than what they said as proceeds from a 4G spectrum auction and 2G rebidding have not been taken into account. So there’s less implementation risk in this budget.”
Investment Outflows

Still, global investors have cut holdings of Indian debt by $634 million since Feb. 29, pulling money out of the local market for the first time in six months, exchange data show.

The cost of protecting the debt of State Bank of India, seen as a proxy for the sovereign, against non-payment climbed this month. Five-year credit-default swaps on the lender now cost 305 basis points, compared with 300 at the end of February, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value in exchange for the underlying debt should a company fail to adhere to its agreements.

Prime Minister Manmohan Singh’s government is facing hurdles to his policies from its largest coalition partner, Trinamool Congress. The ally’s leader, Mamata Banerjee, opposed a plan to raise passenger rail fares, proposed by her party colleague Railway Minister Dinesh Trivedi this week.
‘No Roadmap’

The government was forced to scrap plans to allow foreign retailers like Wal-Mart Stores Inc. (WMT) into India in December amid opposition from its allies, including Trinamool. Singh shelved proposals to allow foreign direct investment in pensions in December after Trinamool refused support.

“As a foreigner, I am disappointed because there is no roadmap for reforms and no indication of how the most difficult task of curbing the deficit will be met,” Taina Erajuuri, a Helsinki-based money manager at FIM that oversees about 1.1 billion euros ($1.4 billion) of emerging-market assets, said in an interview on March 16. “The government may not be able to meet its deficit target because of deepening global uncertainties.”

The 10-year yield may climb to 8.6 percent in three months, she predicted.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net.

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net.
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