Budget 2019 Lacks Plan For Meaningful Fiscal Consolidation, Says Fitch Ratings
Budget 2019 outlines some economic reforms to support the Indian economy but fiscal stance was left broadly unchanged, says Fitch.
Union Budget 2019-20 outlined some economic reforms that could support the Indian economy, but its fiscal stance was left broadly unchanged with no plans for meaningful consolidation, Fitch Ratings Inc. said Wednesday.
The budget targets a slight narrowing in the fiscal deficit target to 3.3 percent of the gross domestic product in 2019-20, from an estimated 3.4 percent in the last fiscal.
The budget, presented by Finance Minister Nirmala Sitharaman on July 5, indicates that the Narendra Modi govenrment will continue with its economic reforms, said Fitch Ratings in a statement.
"However, it falls short of signalling prospects for significant fiscal consolidation in the next few years. The medium-term fiscal deficit targets of 3 percent in 2020-21 and 2021-22 make it highly unlikely, in our view, that the debt ceiling of 60 percent for general government debt will be met by 2024-25, as stipulated in Fiscal Responsibility and Budget Management (FRBM) Act," the statement read.
Plans to support growth include Rs 100 lakh crore of infrastructure spending in the next five years and efforts to encourage foreign direct investment in certain sectors, including electronics.
The government also intends to reduce its ownership in some non-financial public sector entities and modify its policy of retaining at least 51 percent direct holding. It will also inject a further Rs 70,000 crore into public sector banks, as part of an ongoing PSU bank recapitalisation plan.
According to Fitch, some of the measures spelt out in Budget 2019 could weigh on GDP growth over time, such as higher import duties on many products to "provide a level playing field to domestic industry".
Fitch believes the PSU bank recapitalisation plan will allow government banks to meet minimum regulatory capitalisation requirements but may not leave much space for the lenders to accelerate credit growth in the current fiscal, considering slow recovery from non-performing assets and ongoing provisioning against them.
The ratings agency sees the fiscal deficit target, 3.3 percent of GDP in 2019-20, as broadly credible, but “projected revenue growth, at 13.5 percent, may prove optimistic as it is based on the government's higher 7 percent real GDP growth forecast and disinvestment targets might not be met". Fitch has projected India GDP growth rate at 6.6 percent in 2019-20 and 7 percent in 2020-21.
"There is also a recent history of modest slippage relative to fiscal targets, but the government plans to continue increasing the number of registered taxpayers and could reduce or postpone spending if revenue underperforms," it added.
Fitch also expects off-budget spending to increase due to factors like the PSU bank recapitalisation, which is equivalent to 0.3 percent of India’s GDP.
"This should not affect the fiscal deficit, but it will raise the debt level. Weak public finances are a key constraint on India's 'BBB-'/Stable sovereign rating," Fitch said.