Agency says lower debt trajectory key to reviewing its negative rating outlook on India
Rating agencies are not enthused by the fiscal consolidation road map and the lack of major reform proposals in the Union Budget.
Fitch Ratings, which has a negative outlook on India’s sovereign rating, said that beyond the higher capex drive, the Budget was short on major reforms and the fiscal deficit target for 2022-23 at 6.4% of the GDP, is higher than the 6.1% it had anticipated.
“Deficit targets presented in the Union Budget on February 1 are a bit higher than our forecasts when we affirmed India’s ‘BBB-’/Negative sovereign rating in November,” Jeremy Zook, director and primary sovereign analyst for India at Fitch Ratings, said.
“Our expectation of modest fiscal outperformance in 2021-22 from last year’s Budget target appears unlikely to materialise, with the Budget flagging a revised deficit of 6.9% of GDP against our 6.6% forecast,” he noted.
Limited fiscal space
From a ratings perspective, India has limited fiscal space with the highest general government debt ratio among any similarly rated emerging markets at just under 90% of GDP, as per Fitch Ratings.
“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,” Mr. Zook said.
If fully implemented, the planned infrastructure capex acceleration will likely provide a fillip to near- and medium-term growth, Fitch said, adding it would be assessing whether the capex drive’s growth impact was sufficient to offset the ‘higher than expected deficits’ and keep the debt ratio on a ‘slight downward’ trajectory.
Fitch expects the economy to grow at 10.3% in 2022-23 and average 7% growth in the coming five years. The potential risks and headwinds for this outlook stem from the pandemic, the durability of private consumption as household incomes are constrained, and ‘recent setbacks to the reform drive’.
Moody’s initial comments
In its initial comments, Moody’s Investor Service also flagged that “various spending initiatives were not offset by any significant announcements related to further increasing revenue generation”.
“The announced target for the Central government deficit to narrow 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 help drive fiscal consolidation in light of the large bump in capital expenditure. This poses some uncertainty given the prevalence of pandemic-related risks,” Christian de Guzman, senior vice-president, sovereign risk group at the firm, said.
Both Fitch and Moody’s expressed worries about the States’ finances, as their deficits would add further pressure on India’s general government deficit levels.
“On a general government basis, State government finances also continue to pose challenges to fiscal consolidation given higher spending implied by the larger allocation for financial assistance for capital expenditure at the State level and the allowed deficit of 4% of GSDP [Gross State Domestic Product],” Mr. de Guzman noted.
Brickwork Ratings’ chief economic adviser M. Govinda Rao noted that the fiscal deficit for 2022-23 should have been contained at 5.5% of the GDP as per the fiscal consolidation path recommended by the 15th Finance Commission under a slow recovery scenario.
“Instead, the Budget pegged the fiscal deficit at 6.4% and chose to increase capital expenditure to a record level of 2.9% of the GDP. The Finance Minister has promised that the rate of consolidation will be faster in the coming years to reach 4.5% of GDP by 2025-26,” he added.