CHENNAI: Given that the fiscal deficit has risen from 3.2 per cent to 3.5 per cent against the estimates for March 2018 and further the deficit for the next fiscal year has been set at 3.3 per cent from the original plan of 3 per cent, rating agencies have threatened to downgrade India’s sovereign rating if the government fails to mind its deficit math.
However, within hours of reports by the rating agencies commenting high-debt burden constraints India’s rating, Economic Affairs Secretary Subhash Chandra Garg said the government will try to convince rating agencies on its commitment to fiscal consolidation. Garg said a convincing path has been laid down in the Budget by amending the Fiscal Responsibility and Budget Management (FRBM) Act. “There is no question of losing hope...ours is a convincing story to tell and I hope they (rating agencies) get convinced,” he added.
India’s 2018-19 fiscal budget unveiled on Thursday had assumptions for income tax collection that were “somewhat optimistic,” said Kim Eng Tan, senior director at S&P Global Ratings, adding any shortfalls might lead to cuts in “the much-needed infrastructure spending.” Noting that reduced infra spending has the potential to hit economic growth, Tan said the prospect may lead S&P to consider reducing India’s rating. S&P rates India at “BBB-minus” with a “stable” outlook. BBB-minus is the lowest investment-grade rating.
“If growth were to slow and if the government deficit were to rise significantly this could cause us to lower the rating. Or if we perceive that the political will to maintain India’s reforms were to sputter, that’s another reason we could lower the rating,” the analyst added.
Thomas Rookmaaker, director and primary sovereign analyst for India, Fitch Ratings, said that “if implemented well (the schemes announced by the government), spending on such measures would likely reach a large part of the electorate, which is not insignificant with general elections coming up.” He added weak public finances “constrain India’s sovereign ratings,” given a high general government debt burden of around 68 per cent of GDP and a wide fiscal balance of 6.5 per cent of GDP if states are included.
High fiscal deficit can also put pressure on government borrowings and bond market yields. However, we will have to closely watch inflation behaviour against factors such as the Brent and the US Fed rates showing signs of hardening.