Fiscal deficit slack is not good, say rating agencies
India’s wait for a ratings upgrade may get longer. Rating agencies have expressed concerns over finance minister Arun Jaitley’s budget proposal to cut India’s fiscal deficit – the amount the government borrows to balance its books – to 3% in three years, instead of two as envisaged earlier.business Updated: Mar 02, 2015 01:17 IST
India’s wait for a ratings upgrade may get longer. Rating agencies have expressed concerns over finance minister Arun Jaitley’s budget proposal to cut India’s fiscal deficit – the amount the government borrows to balance its books – to 3% in three years, instead of two as envisaged earlier.
However, there is no threat of a ratings downgrade. India’s sovereign rating is currently at the last rung of the investible grade – and just a notch above junk status. A higher rating will enable India to attract more investments and get loans at cheaper rates.
“The delayed reduction of the fiscal deficit to 3% of GDP simply underscores our view that fiscal consolidation is proving difficult even as economic growth is accelerating and oil prices are benign,” Moody’s Sovereign Ratings analyst Atsi Sheth told PTI.
The budget envisages cutting India’s fiscal deficit to 3.9% in 2015-16 against 3.6% targeted earlier. The overall target of cutting the deficit to 3% by 2016-17 has been pushed back by one year.
Any slippage in meeting this target may force Reserve Bank of India governor Raghuram Rajan to keep interest rates at current levels, thus, delaying any hopes of a reduction in lending rates – and a consequent reduction in EMIs that you pay on your home and other loans.
“The roadmap unveiled by the finance minister is not a huge slippage so long as investment is encouraged,” said DK Joshi, chief economist at Crisil, India’s leading credit rating agency. “I believe that RBI’s stance (on lowering the interest rate) will not change. The budget encourages growth and is non-inflationary. I expect RBI to cut interest rates by 50-75 basis points (100 basis points = 1 percentage point) over the next 12 months,” he added.
“This is a deviation from the earlier announced fiscal consolidation roadmap. (But) 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, a subsidiary of global ratings agency Fitch, said a statement on Sunday.
Rating agencies and analysts will be keenly watching the government’s ambitious disinvestment target of Rs 69,500 crore. In the current financial year, the government has, so far, fallen short of its divestment target by 49% and may not be able to meet it.
“In my view, the government should target meeting 30-40% of the disinvestment target by the first quarter of 2015-16 instead of waiting,” said Crisil’s Joshi.