India's fiscal slippage announced in budget for FY21 is modest: Fitch

Rating agency Fitch on Monday said the fiscal slippage announced by government in budget for FY21 is modest relative to its previous targets, given slowing growth momentum. It is consistent with rating expectations articulated in December 2019 when agency affirmed India’s 'BBB-' rating with a Stable Outlook.

Government has set fiscal deficit target at 3.5 per cent of Gross Domestic Product (GDP) for next fiscal year 2020-21 (Fy21). The centre has also revised estimate for fiscal deficit in Fy20 to 3.8 per cent as against earlier projection of 3.3 per cent. It used provisions in Fiscal Responsibility & Budget Management (FRBM) Act for granting 0.5 per cent leeway in deficit target.

Greater fiscal transparency around off-budget financing is welcome. The new budget now explicitly recognizes borrowing from the National Small Savings Fund of 0.8% of GDP in both FY20 and FY21, to finance food subsidies., Fitch said.

Thomas Rookmaaker, Director and Primary Sovereign analyst for India, Fitch Ratings said the assumptions like nominal growth of 10 per cent and 9.2 per cent rise in revenues are broadly credible. Although, there are risks to the downside.

The new budget targets imply some further postponement of fiscal consolidation. It is in line with the government's ambivalent approach to consolidation of the past few years when deficit outturns have typically exceeded budget targets. "We project general government debt to remain close to 70% of GDP through FY22. India's high public debt relative to peers is a rating weakness”, Fitch said in a statement.

The reductions in the corporate tax rate and new cuts in income tax rates are likely to cause tax revenues to fall in the short run, before any potential medium-term benefits materialize.  The divestment target appears optimistic, at over three times the estimated realisation in FY20.

The budget does not materially alter agency’s view on India’s economic growth outlook, which is forecast to pick up to 5.6 per cent in FY21 from 4.6 per cent in FY20. The budget contains some measures which may support GDP growth in the medium-term, including reduced individual income tax rates, some easing of restrictions on foreign portfolio inflows and continued focus on public infrastructure spending, it added.