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India Budget targets are credit positive; execution key: Fitch

India Infoline News Service | Mumbai |

Uncertainties and risks remain regarding implementation of key policies necessary to achieve both the growth and fiscal deficit targets.

The fiscal and economic targets included in India's FY14/FY15 interim budget would be constructive for the sovereign credit if achieved, says Fitch Ratings. However, the government's objectives of returning growth to 7%-8% within three years and maintaining a tight fiscal consolidation path look ambitious.

Uncertainties and risks remain regarding implementation of key policies necessary to achieve both the growth and fiscal deficit targets. Finance Minister Arun Jaitley has maintained the previous government's budget deficit targets of 4.1%, 3.6% and 3.0% of GDP in FY15, FY16 and FY17, respectively. This compares with Fitch's deficit forecasts of 4.6%, 4.1% and 4.0% over the same period. Fitch is unsure how the government's target path can be met without further revenue-strengthening or expenditure-saving measures - notably, the current budget's specific tax measures actually reduce intake .

Jaitley has stated that fiscal consolidation is to be led by revenue, highlighting the introduction of a new goods and services tax (GST), crackdown on the shadow economy, and higher tax revenues from stronger economic growth. However, there are implementation risks to these policies. The GST will need agreement at the state level, and it remains to be seen how the new tax will look after negotiations.

The budget divestment target of Rs. 634.2bn looks ambitious relative to figures of about Rs. 258bn in both FY13 and FY14. The FY14 divestment undershot an initial budgeted amount of Rs. 558bn.

A further fiscal risk could lie in the government's pledge to recapitalise public sector (PSU) banks. The budget included an investment of Rs. 2.4trn (2% of FY15 GDP) in PSU lenders between now and FY19. This is broadly in line with Fitch's own estimates, but it could be a source of fiscal slippage over the medium term if banks' balance sheets turn out to be in a worse condition than currently thought.

However, even some slippage relative to the government's objectives for the deficit and growth would not necessarily put negative pressure on the ratings. Public debt ratios are projected to drop out to FY17 even under Fitch's more cautious growth and fiscal projections.

The new government, as generally expected, placed an emphasis in its first budget on improving access for foreign capital and incentivising investment. Foreign investment caps in the defence and insurance sectors are being raised to 49% from 26% while the urban construction sector is also being opened to foreign direct investment. The government also pledged to examine the issue of retroactive tax claims which had hurt foreign investor sentiment under the previous administration.
 

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