Wider deficits carry risks of delay to rating upgrades: DBS

As per govt's fiscal consolidation map, deficit is to be brought down to 3.9% of GDP in FY16 and to 3.5% in 2016-17

India's fiscal deficit target for 2016-17 is likely to be adjusted higher to 3.7 per cent of GDP, financial services major DBS said while highlighting that wider deficits carry the risks of a delay in rating upgrades.

According to a report by the financial services major, risks are that the FY2016-17 target is adjusted higher to 3.7 per cent of GDP (as against the roadmap of 3.5 per cent).

DBS believes that investors and rating agencies are unlikely to punish the economy for these missed targets, given the improvement in external balances, growth prospects and the fact that they follow largely from lower inflation.

"However, at the margin, wider deficits carry risks of a delay to rating upgrades, stall the improvement in the public debt-to-GDP ratio and narrow room for monetary stimulus," the DBS report said.

As per the fiscal consolidation path laid out by the government, deficit is to be brought down to 3.9 per cent of GDP in current fiscal and further to 3.5 per cent in 2016-17. It was 4 per cent last fiscal.

"Delays in fiscal consolidation for a second year mean rating upgrades are unlikely for at least another year," it added.

A wider fiscal deficit is inflationary and the number is also tracked by credit rating agencies for their view on the sovereign.

In the recent past, foreign rating agencies have threatened to downgrade the sovereign rating to the junk status, which is already just a notch above investment grade at BBB- with a stable outlook, with the higher fiscal deficit number being one of the major concerns.

Finance Minister Arun Jaitley is scheduled to present the 2016-17 Budget on February 29, which the rating agencies would be watching closely for determining India's credit profile.

Last year Moody's upgraded India's outlook to 'positive' from 'stable', but retained the credit rating at the at 'Baa3'. Other global rating agencies like S&P, Fitch has a 'stable' outlook on India.

Moreover, the room for monetary stimulus will narrow to ensure demand-driven inflationary pressures stay in check, the report said.

"The Reserve Bank of India meets next on February 2 and we expect the benchmark rates to be kept on hold," it added.