Higher fiscal deficit: Rating agencies frown at fine-print

Rating agencies have not red-flagged the Budget stretching fiscal deficit target by 0.3 percentage points to 3.9 per cent in FY16, but cautioned that higher borrowings should be used for only capacity-building in the economy.
"This is a deviation from the earlier announced fiscal consolidation roadmap. We believe a higher fiscal deficit as such is not harmful, so long as the borrowed money is used for expanding the productive capacity of the economy," India Ratings said in a statement.
It, however, said that the fine-print in the Budget does not support this.
"The quality of fiscal deficit measured by the ratio of revenue deficit-to-fiscal deficit under FY15 revised estimate is 70.7 per cent while the FY16 budget estimate is 71 per cent," it said.

It can be noted that a majority of the major international rating agencies have warned the country about the high fiscal deficit in the past. In the run-up to the Budget, S&P and Moody's even had said the high fiscal deficit was among the factors which "constrains" the country's rating.
In the Budget announced yesterday, Finance Minister Arun Jaitley had said the government would achieve the 4.1 per cent fiscal deficit target in FY15, but increased the FY16 target to 3.9 per cent as against 3.6 per cent set earlier, as part of the fiscal consolidation roadmap.

He had also put off the 3 per cent target by a year to FY18, saying "rushing into" a pre-set timetable for fiscal consolidation will not be conducive for growth.

Accordingly, the fiscal deficit targets are 4.1 per cent for FY15, 3.9 per cent for FY16, 3.3 per cent for FY17 and 3 per cent for FY18, each year missing 30 bps.
Stressing that the economy needs public expenditure, Jaitley plans to utilise the additional legroom for capital expenditure.
"The total additional public investment over and above the revenue estimates is planned to be Rs 1.25 trillion out of which Rs 70,000 crore would be capital expenditure from budgetary outlays," he said.