Robust performance

Sustained fiscal consolidation will improve ratings

Just a few days before the votes are counted for the ongoing general elections, which will determine the political composition of the next Union government, S&P Global Ratings, one of the three major global rating agencies, raised its outlook for India to “positive” from “stable” on Wednesday. This is its first outlook revision since 2014. The agency, however, affirmed its sovereign rating for India — the lowest in the investment grade. The outlook revision was driven by factors such as political stability, economic reforms, and long-term growth prospects. The rating agency expects the growth momentum to continue over the next few years. India’s recovery from the pandemic has indeed been strong, with the economy expanding by over 7 per cent. Last financial year, the full-year numbers for which will be released on Friday, the Indian economy is expected to have grown by about 8 per cent.

The rating agency expects continuity in economic and fiscal policies, irrespective of the election outcome. The composition of government spending has improved over the last few years, with increased emphasis on building infrastructure, which will support economic growth over the medium term. Although the government is moving forward with fiscal consolidation, India’s fiscal position remains a constraint. The rating agency in its note underlined that it might raise India’s ratings if the fiscal deficit narrowed meaningfully. It expects the general government budget deficit to decline from 7.9 per cent of gross domestic product (GDP) in the current year to 6.8 per cent in 2027-28. The debt-to-GDP ratio is expected to remain elevated and not fall below 80 per cent of GDP by 2027-28. It is worth noting that growth after the pandemic has largely been driven by government capital expenditure, which can be difficult to sustain if fiscal-consolidation goals also have to be achieved at the same time.

Thus, the policy challenge for the next government will be to push investment, which will help maintain the growth momentum in the medium term, with a sustained reduction in the fiscal deficit. This will also strengthen India’s case for a rating upgrade. For this financial year, higher than budgeted surplus transfer by the Reserve Bank of India (RBI) will ease fiscal pressure. It remains to be seen how the next government, which will be expected to present the full Budget for this financial year in July, utilises this excess transfer. It would be well advised to reduce the fiscal deficit from the budgeted 5.1 per cent of GDP in the current year and take it closer to the medium-term target of 4.5 per cent. However, irrespective of the cushion provided by the RBI’s surplus transfer, the next government must focus on augmenting revenue collection to structurally improve India’s fiscal position.

One straightforward measure in this regard can be to fix the goods and services tax (GST) system. Encouragingly, as reported by this newspaper, the fitment committee of the GST Council, which has officials from both the Centre and states, has started working on rate rationalisation. Although revenue collection has improved in recent years, the GST system has broadly underperformed. The long-pending rationalisation of rates and slabs will augment revenue collection and improve the fiscal position at both the central and state levels. The next Union government must also reassess direct tax reforms and build capacity in tax administration. Improved revenue collection will help create fiscal space to support long-term economic growth.