However, three factors remain in the concern zone. The first is the state of the financial sector. This probably holds for all countries which have been providing room for borrowers through moratorium as well as extension of credit lines. There is concern that this can mount at some point of time if the economy does not perform. While FY21 will not enter the picture, it should be realised that if the economy does not bounce back in FY22 the NPA issue will resurface for sure which has been highlighted by the agency.
The challenge for India really is that while the government has been quite tight fisted in the area of expenditure, it has little control over revenue generation
The second is the labour market. Here there has been a conundrum posed with the migrant issue not yet being resolved as jobs have been lost that are required. Further non-commencement of business also means that there can be a further fall in employment which can be a tricky issue during the recovery phase. Some states have allowed for layoffs which though good for business can have other social implications for the government.
S&P has also highlighted the fiscal stress that lies ahead which is important because in the times of Covid-19 all governments have been more flexible with their targets. The challenge for India really is that while the government has been quite tight fisted in the area of expenditure, it has little control over revenue generation. The economic package is more through the financial system which is a positive for the fiscal numbers. The budget has taken on only relief work and not gone overboard in spending. However, expected sharp fall in revenue will keep the fiscal deficit of the combined government in the double digit zone. The challenge is to get it back on course in FY22.
The message really is that growth in FY22 will be critical for any further rating action and this in turn will guide the health of the financial sector as well as fiscal balances. The government for sure is aware of these issues and would be tackling them appropriately.
The writer is Chief Economist, CARE Ratings
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