Finance minister Nirmala Sitharaman, in the budget, has pegged the Centre’s fiscal deficit at 6.8% of GDP for FY22, promising to bring it down to 4.5% of GDP by FY26.(Kunal Patil/HT file photo. Representative image)
Finance minister Nirmala Sitharaman, in the budget, has pegged the Centre’s fiscal deficit at 6.8% of GDP for FY22, promising to bring it down to 4.5% of GDP by FY26.(Kunal Patil/HT file photo. Representative image)

GDP to shrink 7% this fiscal, see 13.7% growth in FY 22, says Moody’s

The rating agency also said India’s weak fiscal position will remain a key credit challenge in 2021 with a debt-to-GDP ratio above its peers. India has the lowest investment grade of Baa3 with negative outlook from Moody’s.
By Asit Ranjan Mishra, Gopika Gopakumar
PUBLISHED ON FEB 26, 2021 08:19 AM IST

Indian economy is likely to contract 7% in FY21 and bounce back the next financial year to grow at 13.7%, indicating “normalisation” of business activity and “growing confidence” in the market with the rollout of the Covid-19 vaccine, Moody’s Investors Service said on Thursday.

“That reflects normalisation of activity over a very pronounced base effect. I would not read too much into that number but it does incorporate the expectation that recovery in activity will continue. We will see that reinforced by some degree of vaccine rollout and growing confidence in the market. For FY23 and FY24, we are expecting growth to come around 6.2% reflecting further normalization in activity,” said Gene Fang, associate managing director, Moody’s.

The rating agency also said India’s weak fiscal position will remain a key credit challenge in 2021 with a debt-to-GDP ratio above its peers. India has the lowest investment grade of Baa3 with negative outlook from Moody’s. “Wide fiscal deficits combined with lower real and nominal GDP growth over the medium term will constrain the government’s ability to reduce its debt burden,” said Fang.

Finance minister Nirmala Sitharaman, in the budget, has pegged the Centre’s fiscal deficit at 6.8% of GDP for FY22, promising to bring it down to 4.5% of GDP by FY26. The 15th Finance Commission has recommended bringing the public debt to GDP ratio down from 89.8% of GDP in FY21 to 85.7% of GDP in FY26.

“According to government’s budget speech, it targets a fiscal deficit of 4.5% of GDP by fiscal 2026, which amounts to an average annual deficit reduction of about 0.5% of GDP over four years. Given India’s very high debt burden, this pace of consolidation will prevent any material strengthening in the government’s fiscal position over the medium term, unless nominal GDP growth picks up sustainably to reach higher rates than recorded,” Moody’s said in a statement.

Fang said policy implementation rather than reforms has been a problem area from rating perspective. “Preceding downgrade to Baa3, we took note that several reforms which would have been very supportive of credit profile were probably less effective due to challenges in implementation. For example Goods and Services Tax was a very important reform that was credit positive but fell short of government’s target and the rollout was also a complex one,” he added.

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