SME TImes News Bureau | 03 Jul, 2009
The "dream budget" that people are expecting is unlikely to materialise, says the research arm of global rating agency Moody's.

In a statement released Thursday, it also said delayed monsoon would further dampen India's growth this year, and that the government's divestment policy would not be sustainable.

"Amid a challenging economic environment, the public has high expectations for the fiscal budget proposals to be delivered on Monday," said Sherman Chan, an economist with Moody's Economy.com, and said people were expecting a "dream budget" that in all likelihood would not materialise.

"With revenue under pressure and the debt burden at risk of expanding, policymakers face considerable constraints. Although the budget is expected to cover a wide range of areas from social welfare to business reform, some items on the public's wish list will inevitably be missing," Chan added.

Moody's also said that the government's plan to divest in state-owned companies is not a sustainable strategy.

"Although raising funds from the stock market would jump-start projects without further pressure on the fiscal balance, it is not a sustainable strategy - only a limited number of state-owned companies can be partly privatised," Moody's said.

"Moreover, a rise in initial public offerings of state-owned companies could crowd out private firms - a highly damaging effect in the current business climate of tight borrowing conditions. The government should therefore exploit this strategy only in moderation."

Moody's said that with limited funds in hand, the government needs to set clear priorities.

"Spending that aims to better the well-being of India's most vulnerable groups should focus more on solving fundamental issues than on providing temporary relief," Moody's added.

For instance, Moody's said last year's debt waiver for farmers weighed heavily on the fiscal position but provided limited real help to the needy.

However, without correcting fundamental shortcomings such as poor infrastructure, inadequate agricultural technology, and an insufficient social safety net, farmers could easily slip back into difficulty, it added.

Moody's also felt the delay of the monsoon's arrival this year presented a notable downside risk on India's growth outlook.

"The authorities appear optimistic about India's near-term economic outlook, but the delay of the monsoon this year presents a notable downside risk.

"About 60 percent of summer crops could be hurt badly by insufficient rainfall, subsequently dragging down agricultural performance, which has already been modest in recent quarters," Chan said.

"The damage from a delayed monsoon could spill over to curb business and household income, which in turn would weigh on investment and consumption, which would put the squeeze on service firms," Chan added.