India's fiscal targets higher; consolidation slower than expected: Fitch

Global rating agency Fitch Rating said the deficit targets presented in India’s Budget are higher and medium-term consolidation is more gradual than expected.

Fitch had placed India’s ‘BBB-’ rating on negative outlook in June 2020, in recognition of the Coronavirus (Covid-19) pandemic’s impact on growth prospects and the challenges of the high public debt burden.

The government’s prioritisation of fiscal support for the population’s health and well-being, and ongoing economic recovery are understandable.  At the same time, however, there is little fiscal space. India’s public debt ratio was high prior to the virus shock (around 90 per cent of Gross Domestic Product (GDP) compared to the 53 per cent 2020 ‘BBB’ median).

The Budget forecasts wider near-term deficits of 9.5 per cent of GDP in FY21 and 6.8 per cent in FY22. The pace of consolidation is more gradual than the rating agency had previously anticipated reaching 4.5 per cent only by FY26.

“We view the economic and revenue assumptions underpinning the budget to be largely credible. But, the disinvestment revenue target appears optimistic at over three times higher than the level achieved in FY20”, Fitch said. The government is planning to raise Rs 1.75 trillion through disinvestment.

This Budget also takes further positive steps toward improving fiscal transparency, particularly by bringing the loans from the Food Corporation of India onto the budget.

The wider deficits and more gradual pace of consolidation will lift India’s government debt. It will put more onus on the nominal GDP growth outlook in our assessment of the medium-term debt trajectory. This is core to our view of India’s sovereign rating, Fitch said.

Signs of a weaker-than-anticipated economic recovery or a reassessment of medium-term growth potential would make it more challenging to achieve a downward trend in the debt ratio. It will add to pressure on the rating.

“We currently forecast real GDP to rebound by 11 per cent in FY22 and grow around 6.6 per cent per annum through FY26”, Fitch said.

Higher expenditure, particularly the increase in infrastructure spending in FY22, will likely be supportive of the near-term recovery. The recovery is expected to gather pace due to declining Coronavirus cases and vaccine rollout - and possibly reduce longer-term economic scarring.

"Moreover, we believe the previously legislated labor market and agricultural reforms are potentially positive for the medium-term growth outlook, though they clearly face implementation risks," Fitch said.