Union Budget 2019 outlines reforms to support economy, but lacks plan for fiscal consolidation: Fitch Ratings

New Delhi: 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 on Wednesday. The budget, presented in Parliament on 5 July, 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 percent in 2020-21 and 2021-22 make it highly unlikely, in our view, that the debt ceiling of 60 percent for general government debt will be met by 2024-25, as stipulated in the Fiscal Responsibility and Budget Management (FRBM) Act,” Fitch said in a statement. [caption id=“attachment_4371135” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] Plans to support growth include Rs 100 lakh crore ($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 percent 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 percent in the current fiscal and 7 percent 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 percent of GDP, from an estimated 3.4 percent in the last fiscal. “We think the fiscal targets are broadly credible, although projected revenue growth, at 13.5 percent, may prove optimistic as it is based on the government’s higher 7 percent 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 taxpayers 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 percent 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 ‘BBB-’/Stable sovereign rating,” Fitch said.