With sustained high economic growth rates, a 1.1 billion consumer market, and a fat belly of middle-class nuevo rich, international investors have been lapping up India like they have China. And things were only to get better. Last March's budget saw Indians cheer on the enlightened Manmohan Singh government. Ask finance minister P Chidambaram who, amid the exuberance, promised more good times.

The devil's in the details: expect the US$600 billion economy to expand by 6.9% in 2004-05, industrial growth at 8.9%, and inflation at 5%. But India's gross domestic product, while envious, has been losing its shine. In 2003-04, GDP was 8.2%. In US dollar terms, real GDP was 13.98%. Between 2002-03 and 2003-04 the Indian currency rose by 5.3%. Since China's currency is pegged to the greenback, India's economy is the world's fastest-growing in dollar terms.

So you'd think there'd be enough tigers in the tank for the government to make vital inroads to haul 260 million Indians out of grinding poverty, right? Wrong. In the March budget, Chidambaram promised to shelve cuts to fiscal deficit. He said the deficit would rise to 4.5% of GDP this fiscal year. But who's he blaming for the government's policy incompetence: India's poor? Or are these fighting words for Chidambaram's fat-cat supporters?

Neither, actually. Truth is, Chidambaram's warning was aimed at the leftist allies who support the Singh administration but who've been breathing down Chidambaram's neck relentlessly. Never mind how Congress-I returned from years in the wilderness; it couldn't have formed government let alone survived this long without the radical left's support in Parliament. And to that extent the government's policies, especially its social programs, have been held to ransom by the communists.

Last year Chidambaram pushed through Parliament a fiscal discipline law authorizing that the deficit be cut by 0.3 of a percentage point of GDP each year. But his 2005-06 target is 4.3%. "I was left with no option but to press the pause button vis--vis the [fiscal responsibility] act," Chidambaram said.

"I may add that we are perilously close to the limits of fiscal prudence and there is no more room for spending beyond our means." But it may be too late for the government: international investors, who've ardently embraced India as their newest darling among Asia's economies, have turned moody on India in recent weeks. And it's showing.

Lost the plot

Moody's Investor Services has retained India's foreign currency rating at Baa3, still at investment grade, and slashed the rupee's rating two notches to Ba2. Moody's isn't alone. Fitch Ratings, another international agency, last month said it wouldn't upgrade India's sovereign rating simply on concerns over the fiscal problem. Rubbish. Because Fitch, in typical knee-jerk style, made its decision on the same grounds as Moody's.

It wasn't because the leftists in the United Progressive Alliance government are too powerful or that India's poor are too poor. It wasn't because the outlook on the foreign currency rating is unstable, since it'll mainly be supported by growing foreign exchange reserves. But what's worrying Moody's and Fitch is the lack of meaningful fiscal consolidation by the erratic Chidambaram, who seems to have lost the plot on fiscal policy.

In his first budget in July 2004, Chidambaram projected he'd get the revenue deficit down to 1.8% of the gross domestic product for 2005-06. In this year's budget he has projected a revenue shortfall of 2.7%. That's a full 90 basis points more than what he said eight months ago. There's more. Any down-trend of revenue deficits the difference between revenue income and revenue expenditure will present a gloomy picture anywhere, including India.

What makes India's picture especially worrying is that since the new millennium, revenue deficit as a percentage of fiscal deficit the sum of revenue and capital deficits has been rising. In fact it touched a record 79.71% in 2003-04. Meaning the government uses almost four-fifths of its borrowings just to meet its own housekeeping expenses, leaving very little for capital or productive expenses.

The projected revenue deficit for 2005-06 is Rs953.12 billion roughly 2.7% of GDP estimated for the fiscal year. In absolute terms, though, this is an increase of close to 12%. If the revenue deficit is to be contained to1.8% of GDP for 2005-06, it should've been Rs634.51 billion, or Rs317.77 billion less. That's almost a third lower than Chidambaram's own target calculations. Problem is, revenue spending is up by a whopping 15.66%, from Rs3,860.69 billion in 2004-05 to Rs4,465.12 billion for 2005-06. Meanwhile, capital expenditure is down 43%, from Rs1,197.22 billion in 2004-05 to Rs678.32 billion for 2005-06. Meaning India's capital formation is paltry. Most of the money is going into meeting daily expenses.

A Houdini act

Blind Freddy will tell you that that spells trouble in the long run. But perhaps Chidambaram privately subscribes to John Maynard Keynes' adage: that "in the long run we're all dead" anyway. India's poor may as well be dead now, because if Chidambaram ever gets his act together, he'll realise that to turn the growing fiscal deficit problem on its head, he'll have to cut the deficit not by his predicted 0.3% every year but by 0.9% every year until it reaches zero.

That'll take some doing. After all, revenue deficit, in absolute terms, has fallen only three times in the past 20 years in India, and only by Rs10 billion each time. It'll take guts for Chidambaram to pull off a fiscal Houdini act. But the finance minister isn't Houdini any more than he has the political guts to take the tough decisions not when the leftists are all over his throat.

MANJIT BHATIA, an academician and writer, is also research director of AsiaRisk, a political, economic and risk analysis consultancy in Australia. He specialises in international economics and politics, with a focus on the Asia-Pacific.