Fitch Ratings' initial views on the Indian Budget: Jeremy Zook

2 Feb 2022 , 11:26 AM

• 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. Our expectation of modest fiscal outperformance in FY22 from last year’s budget target appears unlikely to materialize, with the budget flagging a revised deficit of 6.9% of GDP against our 6.6% forecast. The planned 6.4% of GDP FY23 deficit is also higher than our previous 6.1% forecast.
• 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.
• Deficits at the state level could add further pressure to our general government fiscal deficit measure, highlighted by the 4.0% of GSDP borrowing allowance in FY23.
• From a ratings 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% of GDP.
• 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. 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.
• Our growth forecast is on the high side of consensus expectations at 10.3% in FY23 and about 7% 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 light of constrained household incomes and recent setbacks to the reform drive pose headwinds.
• Beyond the capex drive, the budget was short on major growth-enhancing structural reform announcements, in our view.
• 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 budget.

The author of this article is Mr. Jeremy Zook, Director and Primary Sovereign analyst for India, Fitch Ratings

The views and opinions expressed are not of IIFL Securities, indiainfoline.com