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Budget aims at fiscal improvement; debt a rating constraint, says S&P

Friday, February 03, 2017

Union Budget 2017-18 shows India's commitment to improve fiscal performance but heavy debt burden and weak public finances remain key rating constraints, S&P Global Ratings said yesterday. Finance Minister Arun Jaitley presented the Budget for next fiscal in Parliament yesterday in which he planned to cut fiscal deficit to 3.2% and 3% of GDP for next financial year and 2018-19 respectively. The deficit in the current fiscal is estimated to be 3.5% of GDP.

"India's 2017-2018 budget illustrates the government's commitment to improving its fiscal performance over the medium term, despite the hit to near-term growth from the demonetisation initiative," S&P said.

Jaitley in his Budget speech has said the Fiscal Responsibility and Budget Management (FRBM) review committee has favoured lowering government's debt to GDP ratio to 60% by 2023. Currently, the ratio stands at 68.5%.

S&P said if the government's reforms "markedly improve" its general government fiscal out-turns so that this ratio falls below 60%, "positive upward pressure on India's sovereign ratings may build".

"At the same time, we continue to see India's overall heavy burden and weak public finances as key rating constraints," the US-based rating agency said.

In November S&P had ruled out any upgrade in India's sovereign rating through 2017 saying it wants to see more efforts to lower government debt to below 60% of GDP and that it did not expect revenues to rise enough to meaningfully lower the deficit over the medium term. It maintained the lowest investment grade rating of 'BBB-' with a 'stable' outlook.

‘Govt strikes balance between fiscal prudence, growth boost’
Government has struck a balance between prioritising capital spending and being fiscally prudent and the 'favourable expenditure mix' should support 2017-18 growth, says a Goldman Sachs report. According to the global financial services major, fiscal consolidation in 2017-18 is mainly driven by a reduction in expenditure, particularly current spending.

"Overall, we believe the government has maintained a balance between prioritising capital spending and being fiscally prudent," Goldman Sachs said in a research note. The government, in its annual Budget, called for a reduction in fiscal deficit to 3.2% of GDP in 2017-18, from a projected 3.5% in 2016-17 and an estimated 3.9% in 2015-16.

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