Comments on India Budget 2021 – From Jeremy Zook, Director in Fitch Ratings’ Asia-Pacific Sovereigns team

The government’s prioritization of fiscal support for the population’s health and well-being, and ongoing economic recovery are understandable.

Feb 03, 2021 11:02 IST India Infoline News Service

  • Deficit targets presented in India’s central government budget on February 1 are higher, and medium-term consolidation more gradual, than we expected. We placed India’s ‘BBB-’ rating on negative outlook in June 2020, in recognition of the pandemic’s impact on growth prospects and the challenges of the high public debt burden.
  • The government’s prioritization 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 given India’s high public debt ratio prior to the virus shock (around 90% of GDP compared to the 53% 2020 ‘BBB’ median). The budget forecasts wider near-term deficits of 9.5% of GDP in FY21 and 6.8% in FY22 and a more gradual pace of consolidation than we had previously anticipated reaching 4.5% only by FY26.
  • We view the economic and revenue assumptions underpinning the budget to be largely credible, although the disinvestment revenue target appears optimistic at over three times higher than the level achieved in FY20. 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 and put more onus on the nominal GDP growth outlook in our assessment of the medium-term debt trajectory, which is core to our view of India’s sovereign rating. 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 under our forecasts and add to pressure on the rating.
  • We currently forecast real GDP to rebound by 11% in FY22 and grow around 6.6% per annum through FY26. Higher expenditure, particularly the increase in infrastructure spending in FY22, will likely be supportive of the near-term recovery - which we expect to gather pace due to declining coronavirus cases and vaccine rollout - and possibly reduce longer-term economic scarring. Moreover, we believe the previously legislated labour market and agricultural reforms are potentially positive for the medium-term growth outlook, though they clearly face implementation risks.
  • The proposed establishment of an asset reconstruction company and asset management company to deal with bad assets in the banking sector is a potential positive, but more details on the structure and implementation are needed before we can fully assess the impact.

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