Task to strengthen public finances left to next govt after 2019 elections: Fitch Ratings

New Delhi: The deferral of fiscal consolidation roadmap has left the task of strengthening weak public finances to the next government after the 2019 general elections, Fitch Ratings said today.

The government has revised its 2018-19 fiscal deficit projections to 3.3 percent of GDP and for current fiscal to 3.5 percent of GDP, compared with original targets of 3 percent and 3.2 percent, respectively.

The postponement of consolidation in part reflects policies to support the economy, which was held back last year by weak investment and disruptions from demonetisation and the introduction of the Goods and Services Tax (GST), Fitch said.

"The Indian government's Budget has pushed back fiscal consolidation, leaving much of the task of addressing the country's relatively weak public finances to the next administration," Fitch Ratings said in a statement. However, the Budget target revisions are modest, and are balanced by positive reform momentum and a strong economic outlook, the US-based agency said.

New spending initiatives announced in the Budget include measures to boost rural incomes, an ambitious health insurance scheme intended to cover about 50 crore people, and funding for the construction and upgrading of medical colleges and hospitals.

People walk past the headquarters of Fitch Ratings in New York. Reuters image

People walk past the headquarters of Fitch Ratings in New York. Reuters image

"This spending will benefit a large section of the public ahead of general elections due by May 2019," Fitch said.

The fiscal slippage of 0.3 percent of GDP in both 2017 -18 and 2018-19 is relative to last year's Budget targets of 3.2 percent and 3 percent of GDP, respectively.

The target for current fiscal was missed largely because of higher expenditure, Fitch said.

This government's initial fiscal plan, set out in 2014, aimed to reduce the deficit to 3 percent of GDP by FY18 - the level consistent with the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.

"It now does not expect to hit that target until 2020-21, beyond its current electoral term," Fitch said.

Despite this slippage, the government stated in the Budget that it plans to adopt a ceiling of 40 percent of GDP for central government debt, as recommended by the FRBM Committee in January 2017, compared to an estimated 50 percent of GDP in 2017-18.

"This would be a positive step towards a more prudent fiscal framework, if eventually adhered to, even if debt is unlikely to fall below the ceiling by 2022-23, as recommended by the committee," Fitch said. It said the revenue forecasts made in the Budget appear broadly credible.

"Sluggish investment growth remains a drag on the economy, but a recovery might be supported by a corporate tax change that makes more companies eligible for the lower SME bracket, as well as the government's continued infrastructure investment drive," it said.

The Budget decision to increase minimum support prices for agricultural goods to 1.5 times the cost of production is likely to lift rural incomes, but could also push up inflation and bring forward monetary tightening, Fitch noted.

Updated Date: Feb 06, 2018 11:55 AM

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