Budget advances economic reform, but fiscal settings unchanged: Fitch

Financial information services major Fitch Ratings said on Wednesday that the Union Budget for 2019-20 outlines some economic reforms that could support the economy but its fiscal stance remains broadly unchanged with no plans for meaningful consolidation.

The Budget indicates that the government will continue its economic reform efforts in its second term and avoid 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.

However, it falls short of signalling prospects for significant fiscal consolidation in the next few years, said Fitch.

"The medium-term fiscal deficit targets of 3 per cent in financial years 2020-21 and 2021-22 make it highly unlikely, in our view, that the debt ceiling of 60 per cent for general government debt will be met by FY 25 as stipulated in the Fiscal Responsibility and Budget Management (FRBM) Act."

Plans to support growth include Rs 100 lakh crore 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 a 51 per cent direct holding. It will also inject a further Rs 70,000 crore into public sector banks.

"However, the extent and timing of any benefits from the budget measures to GDP growth will depend on policy details that are yet to be announced and on effective implementation," said Fitch.

"Moreover, 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."

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 banks to accelerate credit growth in FY 20, considering slow non-performing loan recoveries and ongoing provisioning.

The budget targets a slight narrowing in the fiscal deficit target to 3.3 per cent of GDP from an estimated 3.4 per cent in FY 19 and in the FY 20 interim budget.

"We think the fiscal targets are broadly credible although projected revenue growth at 13.5 per cent may prove optimistic as it is based on the government's higher 7 per cent real GDP growth forecast and disinvestment targets might not be met," said Fitch.

There is also a recent history of modest slippage relative to targets, but the government plans to continue increasing the number of registered tax payers and could reduce or postpone spending if revenue underperforms.

"We believe off-budget spending is likely to increase due to, for instance, the additional banking sector recapitalisation, which is equivalent to 0.3 per cent of GDP," said Fitch.

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 which we affirmed on April 4.