Fitch Rating Points Out High Fiscal Deficit as the Main Roadblock

Although last 12 months have witnessed COVID Pandemic, lockdowns, pubic movement restrictions and whatnot, but according to Fitch Ratings, India’s high fiscal deficit would pose the most critical challenge in lowering the debt to GDP ratio, which is expected to rise above 90 per cent in the next five years.

It said India entered the pandemic with little fiscal headroom from a rating perspective. Its general government debt/GDP ratio stood at 72 per cent in 2019, against a median of 42 per cent for 'BBB' rated peers.

Fitch said the budget points to a loosening of fiscal policy to support the country's ongoing economic recovery from the pandemic and will consequently lead to a rise in public debt. The debt/GDP trajectory is core to our sovereign rating assessment, meaning higher deficits and a slower consolidation path will make India's medium-term growth outlook take on a more critical role in our analysis, Fitch Ratings said in a statement.

It now expects public debt/GDP to rise above 90 per cent of GDP over the next five years, based on the revised budget targets. However, recent reforms and policy measures, including those announced in the budget, could also influence the rating agency's growth expectations and its debt trajectory forecasts.

Fitch estimated India to clock a 11 per cent growth in the fiscal beginning April and then grow at 6.5 per cent a year through to 2025-26 fiscal.

The agency had in June last year revised India's 'BBB-' rating outlook to negative from stable based on its assumptions of the likely impact of pandemic on public finance.

" The budget's deficit projections for the fiscal years ending March 2022 (FY22) to FY26 are about 1pp (percentage point) a year above our previous estimates between, which could make it more challenging to put debt/GDP on a downward trajectory," Fitch said.

India has exceeded its fiscal deficit target of 3.5 per cent in the current fiscal by a wide margin due to higher spendings to stimulate the economy amid the pandemic.

The fiscal deficit — the excess of government expenditure over its revenues — has been pegged at 9.5 per cent of the gross domestic product (GDP) in the current fiscal ending March 31, as per the revised estimate.