Beyond capex, Budget was short on structural reform announcements: Fitch

'From a rating perspective, we see India as having limited fiscal space as it has the highest general government debt ratio of any 'BBB'-rated emerging market sovereign,' says the rating agency

India's budget for the fiscal beginning April focuses on giving a boost to the ongoing economic recovery through a sharp increase in capex spending but is short on major growth-enhancing structural reform announcements, Fitch Ratings said Wednesday.

The deficit targets present in the Union budget 2022-23 by Finance Minister Nirmala Sitharaman on Tuesday "are a bit higher than our forecasts when we affirmed India's 'BBB'/Negative sovereign rating in November," said Jeremy Zook, Director and Primary Sovereign analyst for India, Fitch Ratings.

While it was widely expected that the fiscal deficit will be lower than the targeted 6.8 per cent of the GDP in the current fiscal year ending March 31, 2022, Sitharaman put the number at 6.9 per cent.

"Our expectation of modest fiscal outperformance in (current) FY22 from last year's budget target appears unlikely to materialise, with the budget flagging a revised deficit of 6.9 per cent of GDP against our 6.6 per cent forecast," Fitch said. "The planned 6.4 per cent of GDP FY23 deficit is also higher than our previous 6.1 per cent forecast."

Sitharaman's Rs 39.45-trillion Budget details higher spending on highways to affordable housing to fire up the key engines of the economy to sustain a world-beating recovery from the pandemic.

"This budget illustrates the government's focus on giving a boost to the ongoing economic recovery through a sharp increase in capex spending while relying on economic growth and buoyant revenues to achieve its fiscal sustainability objectives," Zook said.

Deficits at the state level could add further pressure to our general government fiscal deficit measure, highlighted by the 4.0 per cent of Gross State Domestic Product (GSDP) borrowing allowance in FY23 (April 2022 to March 2023).

"From a rating perspective, we see India as having limited fiscal space as it has the highest general government debt ratio of any 'BBB'-rated emerging market sovereign at just under 90 per cent of GDP," the rating agency said.

The gradual pace of fiscal consolidation continues to place the onus on nominal GDP growth to facilitate a downward trajectory in the debt ratio, which is key to resolving the negative outlook on the sovereign rating, it said.

"We will be assessing whether the capex drive's growth impact is sufficient to offset the higher than expected deficits and keep the debt ratio on a slight downward trajectory," Zook said. "Our growth forecast is on the high side of consensus expectations at 10.3 per cent in FY23 and about 7 per cent on average through FY27."

The planned acceleration in the infrastructure capex drive will likely provide a fillip to near- and medium-term growth if fully implemented. However, potential risks from the pandemic, the durability of private consumption in the light of constrained household incomes and recent setbacks to the reform drive pose headwinds, Fitch said.

"Beyond the capex drive, the budget was short on major growth-enhancing structural reform announcements, in our view," Zook said.

"The economic and revenue assumptions underpinning the budget are largely credible and the target for disinvestment is more achievable than in last year's budget. The government also appears to be following through on its efforts to improve budget transparency by keeping previously off-budget spending on the budget.