Task to strengthen weak public finances left on next administration: Fitch Ratings

07 Feb 2018 Evaluate

Fitch Ratings in its latest report stated that the Indian government’s budget has pushed back fiscal consolidation, leaving much of the task of strengthening weak public finances to the next administration after the 2019 general elections. However, it said that the budget target revisions are modest, and are balanced by positive reform momentum and a strong economic outlook. Besides, it noted that postponement of consolidation in part reflects policies to support the economy, which was held back last year by weak investment and disruptions caused by demonetisation and the introduction of the Goods and Services Tax (GST).

The US-based agency has stated that in the Union Budget for 2017-18, the government announced new spending initiatives including measures to boost rural incomes, an ambitious National Health Protection Scheme intended to provide health insurance cover to 50 crore Indians, and funding for the construction and upgrading of medical colleges and hospitals. It noted that this spending will benefit a large section of the public ahead of general elections due by May 2019. Adding further, it said that the government has revised the fiscal deficit target at 3.5% of GDP for 2017-18 and projected 2018-19 deficit at 3.3% of GDP, compared with original targets of 3.2% and 3%, respectively. It indicated that the fiscal slippage of 0.3% of GDP in both 2017 -18 and 2018-19 is relative to last year’s budget targets of 3.2% and 3% of GDP, respectively.

According to the report, the target for FY18 was missed largely because of higher expenditure. It also said that this government’s initial fiscal plan, set out in 2014, aimed to reduce the deficit to 3% of GDP by FY18 - the level consistent with the Fiscal Responsibility and Budget Management (FRBM) Act of 2003. It pointed out that despite this slippage, the government stated in the budget that it plans to adopt a ceiling of 40% of GDP for central government debt, as recommended by the FRBM Committee in January 2017, compared to an estimated 50% of GDP in 2017-18. It added that this would be a positive step towards a more prudent fiscal framework, if eventually adhered to, even if debt is unlikely to fall below the ceiling by 2022-23, as recommended by the committee.

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