India’s Budget Targets Slide Amid Growth Slowdown: Fitch Ratings

New Delhi, February 5: The Union Budget for the fiscal year ending March 2021 (FY21) implies a modest degree of slippage from previous targets to consolidate public finances, said Fitch Ratings.

“However, its contents are consistent with our expectations when we affirmed the country's sovereign rating at 'BBB-'/Stable in December 2019,” the rating agency said.

The budget projects a fiscal deficit of 3.5 per cent in FY21 and implies a further postponement of the central government's medium-term fiscal deficit target of 3 per cent of GDP as it prioritises efforts to support economic growth in the context of the ongoing sharp slowdown.

A slippage of 0.5 per cent of GDP in both FY20 and FY21 relative to the earlier targets is in line with the tendency for deficit out-turns to exceed targets in the past few years, it analysed.

Finance Minister, Nirmala Sitharaman has projected in her budget speech that the deficit would fall from 3.8 per cent of GDP in FY20 to 3.5 per cent in FY21. “We believe most assumptions in the budget, such as nominal GDP growth of 10 per cent and a 9.2 per cent rise in fiscal revenues, are credible,” Fitch said in its report.

“However, risks are likely skewed towards the downside, particularly for revenues in light of previously announced cuts in the corporate income tax rate and newly unveiled income tax rate reductions. These tax cuts may stimulate economic activity in the medium term, but their impact on fiscal revenues is likely to be negative in the short term,” it added.

Another downside risk in the government's fiscal projections is the degree to which it expects asset sales to fill the revenue gap left by tax cuts. Its divestment target for FY21 is around three times as large as its expected total for realised sales in FY20. To achieve this, the government would have to address its persistent tendency to fall short of announced asset-sale targets; asset sales in FY20, for example, were only 40 per cent of the planned total, Fitch analysed.

Fitch said: “We believe it is highly unlikely the country's general government debt will be brought within the ceiling of 60 per cent of GDP by FY25, as stipulated in the Fiscal Responsibility and Budget Management Act.”

Fitch projected that government debt will remain close to 70 per cent of GDP throughout the period to FY22. India's high public debt levels are a weakness relative to its rating peers (the BBB median stood at 41.1 per cent in 2019).