Agency says lower debt trajectory key to revising its negative rating outlook on India
Rating agencies are not enthusiastic about the roadmap for fiscal consolidation and the absence of major reform proposals in the EU budget.
Fitch Ratings, which has a negative outlook on India’s sovereign rating, said beyond higher capital spending, the budget lacked major reforms and the fiscal deficit target for 2022-23. to 6.4% of the GIP, is superior to the 6.1% had anticipated.
“The deficit targets presented in the Union budget on February 1 are somewhat higher than our forecast when we affirmed India’s ‘BBB-‘/Negative sovereign rating in November,” said Jeremy Zook, Director and Senior Sovereign Analyst for India at Fitch Ratings.
“Our expectation of a modest fiscal outperformance in 2021-22 against last year’s fiscal target looks unlikely to materialize, with the budget signaling a revised deficit of 6.9% of GDP against our forecast of 6.9%. .6%,” he noted.
Limited budget space
From a ratings perspective, India has limited fiscal space with the highest general government debt ratio among all similarly rated emerging markets, at just under 90% of GDP, according to Fitch Ratings.
“The gradual pace of fiscal consolidation continues to tax nominal GDP growth to facilitate a downward debt ratio path, which is critical to resolving the negative sovereign rating outlook,” Mr. Zook.
If fully implemented, the projected acceleration in infrastructure investment spending is likely to boost growth in the short to medium term, Fitch said, adding that it would be a matter of assessing whether the impact of growth in investment spending was sufficient to offset “higher-than-expected deficits” and keep the debt ratio on a “slightly declining” path.
Fitch forecasts economic growth of 10.3% in 2022-2023 and average growth of 7% over the next five years. Potential risks and headwinds to this outlook stem from the pandemic, the sustainability of private consumption amid constrained household incomes and “recent setbacks in the reform campaign.”
Moody’s early comments
In its initial comments, Moody’s Investor Service also reported that “various spending initiatives were not offset by any material announcements related to a further increase in revenue generation.”
“The announced target of reducing the central government deficit to 6.4% in 2022-23, from a projected 6.9% in 2021-22, suggests that the government is relying on strong economic growth to contribute to fiscal consolidation given the sharp increase in capital spending. This poses some uncertainty given the prevalence of pandemic-related risks,” said Christian de Guzman, senior vice president, Sovereign Risk Group of the company.
Fitch and Moody’s expressed concerns about state finances as their deficits would add further pressure on Indian government deficit levels.
“On a general government basis, state government finances also continue to pose fiscal consolidation challenges, given the higher spending implied by the larger allocation of financial assistance to capital spending in state level and the authorized deficit of 4% of GDP. [Gross State Domestic Product]Mr. de Guzman noted.
Brickwork Ratings Chief Economic Advisor Mr. Govinda Rao noted that the fiscal deficit for 2022-23 should have been contained to 5.5% of GDP in line with the fiscal consolidation path recommended by the 15th Finance Committee under a slow recovery scenario.
“Instead, the budget pegged the budget deficit at 6.4% and opted to increase capital spending to a record high of 2.9% of GDP. The Minister of Finance has promised that the pace of consolidation will be faster in the coming years to reach 4.5% of GDP by 2025-26,” he added.