Higher disinvestment, dividend target may strain credit profiles of CPSEs: S&P

A higher disinvestment and dividend target for state-owned firms may strain their credit profiles but steps toward private participation in rail infrastructure are likely to create growth opportunities for corporates, S&P Global Ratings said Monday.

S&P forecast the general government's net indebtedness at 67.1 per cent of GDP by the end of the current fiscal year against a projected fiscal deficit of 6.7 per cent of GDP.

"In the context of fiscal constraints, a higher divestment and dividend target for state-owned entities (SOEs) may strain their credit profiles, especially if an SOE has to buy a government stake in another SOE or pay more dividends than free cash flow allows, to support these policy objectives," it said.

The Budget 2019-20 has set a disinvestment target of Rs 1.05 lakh crore, while Rs 57,487 crore is expected to come from central public sector enterprises (CPSEs) as dividend.

S&P believes that the government's proposed injection of Rs 70,000 crore into the banking sector as capital support should help stabilise financial sector's conditions, although the funding is likely to weigh on government finances at the margin.

"A more aggressive divestment plan of SOEs and moves toward private participation in rail infrastructure are likely to create growth opportunities for corporates across sectors," it said.

S&P said the government's growing emphasis on private sector participation reflects its limited fiscal space.

Capital expenditure as a percentage of total proposed expenditure remains very low at just 12.1 per cent, approximately equal to total expenditure on subsidies.

Elevated general government deficits and indebtedness will continue to cap direct infrastructure investment, S&P said.

General government deficits will remain elevated despite the marginal decline at the central government level to 3.3 per cent of GDP this fiscal year projected in the budget, it added.