Budget 2019 lacks meaningful fiscal consolidation plan: Fitch Ratings

Topics budget 2019 | Fitch | Fitch Ratings

Fiscal deficit

India's budget outlined some reforms that could support the economy, but its fiscal stance was left broadly unchanged with no plans for meaningful consolidation, Fitch Ratings said Wednesday.

The budget, presented in Parliament on July 5, indicates that the BJP will continue its economic reform efforts in its second term and avoid the fiscal loosening that might have been expected given the country's sluggish growth, lower lending by non-bank financial institutions and election promises to support rural voters, it said.

"However, it falls short of signalling prospects for significant fiscal consolidation in the next few years. The medium-term fiscal deficit targets of 3 per cent in FY20 and FY21 make it highly unlikely, in our view, that the debt ceiling of 60 per cent for general government debt will be met by FY25, as stipulated in the Fiscal Responsibility and Budget Management (FRBM) Act," Fitch said in a statement.

Plans to support growth include $1.4 trillion 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 per cent direct holding. It will also inject a further Rs 70,000 crore into public sector banks.

"India's new budget outlined some economic reforms that could support the economy, but its fiscal stance was left broadly unchanged, with no plans for meaningful consolidation," Fitch said.

It further said some measures could weigh on growth over time, such as higher import duties on many products to "provide a level playing field to domestic industry".

The global rating agency has projected India growing at 6.6 per cent in the current fiscal and 7 per cent in the next.

Fitch believes the proposed capital injection will allow public sector 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 non-performing loan recoveries and ongoing provisioning.

The budget targets a slight narrowing in the fiscal deficit target to 3.3 per cent of GDP, from an estimated 3.4 per cent in the last fiscal.

"We think the fiscal targets are broadly credible, although projected revenue growth, at 13.5 per cent, may prove optimistic as it is based on the government's higher 7 per cent real GDP growth forecast and disinvestment targets might not be met.

"There is also a recent history of modest slippage relative to targets, but the government plans to continue increasing the number of registered tax payers and could reduce or postpone spending if revenue underperforms," it added.

Fitch also expects off-budget spending to increase due to factors like the additional banking sector recapitalisation, which is equivalent to 0.3 per cent of GDP.

"This should not affect the deficit, but it will raise the debt level. Weak public finances are a key constraint on India's 'PPP', Stable sovereign rating," Fitch said.

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