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Budget points to a loosening of fiscal policy: Fitch Ratings
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SME Times News Bureau | 11 Feb, 2021
Indias Budget presented on February 1 by Union Finance Minister Nirmala
Sitharaman points to a loosening of fiscal policy to support the
countrys ongoing economic recovery from the pandemic and will
consequently lead to a rise in public debt.
The debt/GDP
trajectory is core to our sovereign rating assessment, meaning higher
deficits and a slower consolidation path will make India's medium-term
growth outlook take on a more critical role in our analysis, says Fitch
Ratings.
India entered the pandemic with little fiscal headroom
from a rating perspective. Its general government debt/GDP ratio stood
at 72 per cent in 2019, against a median of 42 per cent for ‘BBB' rated
peers.
"We revised the Outlook on India's ‘BBB-' rating to
Negative, from Stable, in June 2020, partly owing to our assumptions
about the impact of the pandemic on its public finance metrics. The
budget's deficit projections for the fiscal years ending March 2022
(FY22) to FY26 are about 1pp a year above our previous estimates
between, which could make it more challenging to put debt/GDP on a
downward trajectory," Fitch Ratings said.
"We now expect public
debt/GDP to rise above 90 per cent of GDP over the next five years,
based on the revised budget targets and with our other previous rating
assumptions remaining unchanged. However, recent reforms and policy
measures, including those announced in the budget, could also influence
our growth expectations and, thus, our debt trajectory forecasts," Fitch
Ratings said.
Fitch's latest economic outlook projected growth
at 11 per cent in FY22 then at around 6.5 per cent a year through to
FY26. This pace of expansion reflects base effects and the closing of
output gaps after the pandemic shock.
In aggregate, the 2021
budget has the potential to lift growth prospects. Higher expenditure
will support the near-term recovery and increased infrastructure
spending could boost sustainable medium-term growth rates.
Labour
market and agricultural reforms that were legislated in September 2020
could also lift medium-term growth. However, recent adverse court
rulings have highlighted implementation challenges to these reforms and
there is a risk that fiscal spending could also fall short of planned
levels. Meanwhile, the budget's proposed increases in import tariffs
could dampen trade and economic growth, it added.
"Although there
are implementation risks around aspects of the budget, we regard the
government's overall fiscal projections as broadly credible. The
budget's higher deficit forecasts are partly driven by positive steps
toward greater transparency, as previously off-balance-sheet items, such
as loans from the Food Corporation of India, have been brought on
budget," Fitch Ratings said.
The extent to which policy changes
address weaknesses in India's financial sector will also influence the
country's medium-term growth potential. We believe the proposed
injection of Rs 200 billion ($2.7 billion) of new capital into state
banks will be insufficient to alleviate the anticipated incremental
stress on capital levels in 2021 and 2022. State banks are likely to
continue to experience asset-quality problems, weak profitability and
small capital buffers and, as a result, we project credit growth to
remain soft in the absence of further government action.
On the
other hand, the proposed establishment of an asset reconstruction
company and an asset management company to deal with bad banking sector
assets should be credit positive, dependent on the details of its
structure and implementation. Plans to privatise two state banks could
also be significant, but would require changes to the Bank
Nationalisation Act, which would add to implementation challenges. Fitch
will take a considered view of any changes to the Act and take
necessary action should these have broader implications for the sector
or our support assumptions.
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