Will Indias sovereign credit rating be downgraded?

Not just the Indian economic story, the deficit story is also increasingly turning dismal.

There is a Fiscal Responsibility and Budget Management (FRBM) Act, with terminal goals in 2009-10 of a revenue deficit/GDP ratio of 0.0% and fiscal deficit of 3%. The budget estimates for 2008-09 promised a revenue deficit of 0.5% and a fiscal deficit of 2.5%. But this was without providing for items like farmers' debt relief, Sixth Pay Commission and National Rural Employment Guarantee Act (NREGA).

So the budget estimates fudged and on February 16 we will know the Centre's fiscal deficit is 6.5% of GDP. That's without including Oil and fertilizer bonds, which have adverse effects similar to those of the fiscal deficit. With those off-budget items thrown in, the Centre's deficit will be 9% of GDP.

And then we have the states. The combined aggregate state deficit is around 2.5% of GDP. But that is a lagged figure, when tax revenue in states was buoyant.

Low growth affects tax revenue. Hence the State deficit will be 3% and the combined deficit will be 12% of GDP.

Twelve per cent is a horrendous figure, unparalleled since 1991. The issue is not the inevitable downgrading of India's sovereign credit rating, once this becomes public domain information on February 16. More importantly, there was a consensus on fiscal rectitude across every Government since 1991. That disappeared under UPA and the incoming government will find it difficult to reverse the trend. Instead, there will be pressures to dilute and relax FRBM, with similar moves in states.