‘Budget points to slower fiscal deficit cut’

The government has little fiscal headroom at its current rating level to respond to possible shocks to growth, global ratings agency Fitch said in a note on Monday.

Fitch Ratings flagged the slower fiscal consolidation path and said that the higher deficits and continued lack of clarity on medium-term consolidation plans in India’s latest budget added risks to its projection of a downward trajectory in government debt/gross domestic product (GDP).

India’s ratio of public debt to GDP at 87% in FY21 is well above the median of around 60% for ‘BBB’ rated sovereigns, it pointed out.

Fitch underlined “less clarity around the medium-term outlook” and said that the budget offered few details on how it will achieve its broad fiscal deficit target of 4.5% of GDP by 2025-26. “The higher FY23 deficit also implies significant fiscal tightening between FY24 and FY26 to meet the target. Fiscal consolidation tended to fall short of government goals prior to the pandemic, suggesting risks to the medium-term target and debt trajectory,” it said.

The International Monetary Fund has projected the government debt to rise to a record 90.6% of GDP during 2021-22 and expects it to remain above 85% till 2026-27.

Fitch Ratings had revised the outlook on India’s rating from stable to negative in June 2020.

The deficit target of 6.9% of GDP was slightly higher than its projections for FY22 at 6.6% of GDP when it affirmed the rating, it pointed out. The budget forecast of 6.4% of GDP for FY23 was also higher than its 6.1% forecast, it said.

“The borrowing allowance for states, which was maintained at 4.0% of gross state domestic product in FY23, keeping it above the pre-pandemic level of 3.0%, poses further risk to our fiscal forecasts,” it said.

However, the global agency found the near-term fiscal outlook credible. “The nominal GDP growth target for FY23 of 11.1% looks credible and revenue targets, including those for divestments, are realistic. The government also appears to be following through on its efforts to improve budget transparency by keeping previously off-budget spending on budget, limiting downside surprises,” it said.

Fitch pointed out that the planned acceleration in infrastructure capex, if fully implemented, will provide a fillip to near- and medium-term growth. That could offset downside risks to its real GDP growth forecast, at 10.3% in FY23 and about 7% on average through to FY27.

The downside risks include disruption to economic activity associated with the covid-19 pandemic, recent reform slippage, and weakness in household income growth, which may constrain the capacity of private consumption to support growth. “The budget provided no significant new transfers to households or major structural reform initiatives,” it noted.

The budget proposed to increase capex by 24% in FY23 over the revised estimates of FY22.