Higher deficit, lack of clarity on fiscal consolidation raise risks to debt reduction: report

Fitch Ratings said on Monday that higher budget deficits and a lack of clarity about fiscal consolidation plans add risks to its forecast of a reduction in India’s debt-to-gross domestic product (GDP) ratio.

The extent to which planned higher capex (investments) support GDP growth and offset those risks is an important consideration for sovereign ratings, the global rating agency said in a statement.

Risks related to the sustainability of the debt downtrend were a key factor in Fitch’s decision to maintain a “negative” outlook on government bonds when it confirmed India’s “BBB-” rating in November 2021.

“The higher deficits and continued lack of clarity about medium-term consolidation plans in India’s recent budget increase risks to Fitch Ratings’ forecast of a downward trend in government debt-to-GDP ratios,” Fitch said.

The budget presented by the government on February 1 continued to emphasize support for growth over fiscal consolidation, Fitch said.

It added that the deficit targets were “slightly higher than we expected when we confirmed the rating”.

The budget calls for a revised deficit of 6.9 percent of GDP for the fiscal year ending March 2022 (FY22), versus Fitch’s forecast of 6.6 percent.

“The planned deficit of 6.4 percent of GDP in FY23 is also higher than our forecast of 6.1 percent.

“The sovereign credit allowance, which was maintained at 4.0 percent of state gross domestic product in FY23, above the 3 percent pre-pandemic level, poses another risk to our fiscal projections,” he added.

India’s public debt-to-GDP ratio of about 87 percent in FY21 (ending March 2021) is well above the median of about 60 percent for BBB-rated government bonds.

“We changed the outlook on India’s rating from stable to negative in June 2020, in part due to our assumptions about the impact of the pandemic on public finance metrics.

”The government at its current rating level has little fiscal space to respond to potential growth shocks,” Fitch added.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

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