Fiscal deficit: Higher deficit and lack of clarity on fiscal consolidation add risks to debt reduction: report

Fitch Ratings said on Monday that higher budget deficits and lack of clarity on consolidation plans in the budget add risks to its projection of India’s lower debt-to-gross domestic product (GDP) ratio. The extent to which the projected rise in investment (capital spending) supports GDP growth and offsets these risks is an important consideration for sovereign ratings, the global rating agency said in a statement.

Risks related to the sustainability of the downward debt trajectory were a key factor in Fitch’s decision to maintain a “negative” outlook on sovereign debt when it affirmed the “BBB-” rating of the India in November 2021.

“Higher deficits and continued lack of clarity on medium-term consolidation plans in India’s latest budget add risks to Fitch Ratings’ projection of a downward trajectory in public debt to GDP” , said Fitch.

The budget presented by the government on February 1 continued to focus on supporting growth rather than fiscal consolidation, Fitch said.

He added that the deficit targets were “slightly higher than what we had expected when we confirmed the rating”.

The budget set a revised deficit of 6.9% of GDP for the fiscal year ending in March 2022 (fiscal year 22), against Fitch’s forecast of 6.6%.

“The projected deficit of 6.4% of GDP for FY23 is also higher than our forecast of 6.1%.

“Borrowing room for states, which was held at 4.0% of state gross domestic product in FY23, keeping it above the pre-pandemic level of 3% , presents an additional risk to our fiscal forecasts,” he added.

India’s public debt-to-GDP ratio, at around 87% in FY21 (ending March 2021), is well above the median of around 60% for BBB-rated sovereigns.

“We revised India’s rating outlook to Negative from Stable in June 2020, in part due to our assumptions regarding the impact of the pandemic on public finance parameters.

“The government has little fiscal space at its current rating level to respond to potential shocks to growth,” Fitch added.

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