India is expected to witness a gross domestic product (GDP) growth of 5.6 per cent in the next fiscal, lower than the government’s Economic Survey projection of 6-6.5 per cent, according to Fitch Ratings, which recently said the latest budget has not ‘materially altered’ its view on the country’s growth outlook. The government estimate was 5 per cent for 2019-20.
“The fiscal slippage announced in the government’s new FY21 budget is modest relative to its previous targets, and is consistent with our expectations when we affirmed India’s ‘BBB-’ rating with a stable outlook last December, given slowing growth momentum,” said Thomas Rookmaaker, Director and Primary Sovereign Analyst for India in the rating agency.
“The new budget targets imply some further postponement of fiscal consolidation, in line with the government’s ambivalent approach to consolidation of the past few years when deficit out-turns have typically exceeded budget targets,” Fitch said Projecting General Government debt to remain close to 70 per cent of GDP till fiscal 2021-22.
India’s high public debt relative to peers is a rating weakness, it said. “The budget does not materially alter our view on India’s economic growth outlook, which we forecast to pick up to 5.6 per cent in FY21 from 4.6 per cent in FY20,” it said.
The report further noted that budget contains some measures that may support GDP growth in the medium-term, including reduced individual income tax rates, some easing of restrictions on foreign portfolio inflows, continued focus on public infrastructure spending, and schemes of which the details remain to be announced to encourage manufacturing in the electronics and textiles sectors, according to a report.
The rating agency said the assumptions in the budget, including nominal growth of 10 per cent and a rise in revenues by 9.2 per cent were “broadly credible” although there were risks to the downside. “In particular, reductions in the corporate tax rate, as previously announced, and new cuts in income tax rates are likely, in our view, to cause tax revenues to fall in the short run, before any potential medium-term benefits materialise; the divestment target appears optimistic, at over three times the estimated realisation in FY20,” it said.
“Greater fiscal transparency around off-budget financing is welcome, as the new budget now explicitly recognises borrowing from the National Small Savings Fund of 0.8 per cent of GDP in both FY20 and FY21, e g to finance food subsidies, although this is not incorporated in the headline figure (which would be 4.6 per cent of GDP in FY20 instead of 3.8 per cent),” Fitch said.
