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31
January 2019
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Growth (The Total Investment & Insurance Solutions)
Ahead of BJP-led NDA government presenting
the final budget of its tenure, Fitch Ratings Thursday warned of a second
consecutive year of fiscal slippage in the event of Finance Minister Piyush
Goyal resorting to populist spending to win over lost vote base. The interim
budget to be presented Friday could give some indication of the government's
commitment to fiscal consolidation, which is one of the main sensitivities in
the sovereign ratings, Fitch said.
"Pressure for new expenditure to attract
votes, particularly among rural and small-business owner voters, has increased
as polls have shown the ruling Bharatiya Janata Party (BJP) is becoming less
assured of victory in the general elections. "The BJP has reportedly lost
votes in some recent state elections due to rural distress and public concerns
over job creation. Targeted cash programmes appear the most likely form of
support, as they would avoid downside risks of alternatives, such as the farm
loan waivers that undermined the loan repayment culture in the past," it
said.
Populist spending, it said, would aggravate
fiscal pressures, which are already building due to revenue shortfalls.
"Higher pre-election spending could risk a second consecutive year of
fiscal slippage relative to the government's targets and would further delay
plans to reduce the high general government fiscal deficit and debt
burden," it said.
Fitch said longer-term trends are more
important to the sovereign rating profile. "We believe the central
government may still be able to meet its fiscal deficit target of 3.3 per cent
of GDP for FY19, which would help support its fiscal credibility, although this
may be achieved by deferring capital expenditure and postponing bill payments
until after March," it said.
The
final budget for the fiscal year ending in March 2020 (FY20) will be presented
soon after the next government takes office following general elections, which
are due by May 2019. Revenue from the new GST is well below target, Fitch said
citing it as an reason for revenue falling short of the target so far in the
current fiscal year that ends on March 31, 2019. "Officially, the
government still aims to adhere to a debt ceiling of 60 per cent of GDP by
March 2025, as adopted under the Fiscal Responsibility and Budget Management
Act.
However, this would require significant and
politically difficult fiscal consolidation. The newly elected government's
final budget, likely to be presented around July, should provide more
meaningful guidance on the medium-term fiscal outlook," it said. Fitch's
base-case scenario is that general government debt will remain close to 70 per
cent of GDP in the next few years, and will constrain India's sovereign rating
(BBB-/Stable). Indian budgets normally offers guidance on plans for structural
reforms and tax changes
"The current government could choose in
its interim budget to signal the reform direction it would adopt in a possible
second term, but we believe it is more likely to include such plans in the final
budget...," it said.
The government's reform efforts have led to a
strong improvement in the World Bank's Ease of Doing Business ranking in recent
years, but FDI inflows have remained roughly stable as a percentage of GDP over
the past five years, as there are lingering difficulties, such as in enforcing
contracts and the functioning of the labour market.The Total Investment & Insurance Solutions
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