Budget A Shot In The Arm For Economy, No Material Effect On Credit Factors: S&P

Budget 2021-22 is a comprehensive effort by India to shore up a nascent economic recovery, S&P Global Ratings said, even as aggressive provisioning to help heal the country will be costly.

India's budget is a “shot in the arm” for the economy but the “brawny” spending programme also entails higher-than-expected general government deficits, the rating agency said in a note. It estimates the general government deficit at more than 14% of GDP in 2020-21 and at 11.6% in 2021-22.

“While we currently see no material effect from the budget on India's key credit factors, the economy's brightening growth prospects will be critical to maintain sustainability of India's public finances, with general government debt likely to hover at more than 90% of GDP over the next few years,” S&P Global Ratings said.

Amid uncertainty over enduring pandemic-related risks, the measures in the budget, including the ramp-up in healthcare expenditure and capital spending, should aid the economy in getting back on track, it said.

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S&P expects the Indian economy to contract 7.7% in 2020-21 compared to its previous estimate of a 9% decline. But it will take a long time for India's economy to heal from the pandemic. The economy is likely to recover to its pre-Covid output level in the next fiscal when it is estimated to grow 10%, it said.

India's consistently strong real GDP growth is an important support to the sovereign ratings, and the government's efforts to fortify growth prospects should help to maintain the economy's healthy long-term prospects, it said. Should economic growth materially underperform, weaker financial savings generation could imperil the government's ability to continue to finance itself at relatively affordable rates, the rating agency cautioned. Sustained high deficits, it said, could also distort capital allocation, pressuring private sector investment.

Finance minister Nirmala Sitharaman during her budget speech said the central government's fiscal deficit settled at 9.5% in 2020-21—the highest since at least liberalisation in 1991—and will be targeted at 6.8% in 2021-22.

“As a consequence of India's exceptionally high fiscal deficit this fiscal, in combination with the economy's record contraction, we estimate that the general government's net stock of debt will surge by about 18% to 92% of GDP by the end of 2020-21,” S&P said. With the deficit set to remain higher than 10% of GDP in fiscal 2022, and likely to recede only gradually thereafter, strong nominal GDP growth will be critical in the government's plans to grow its revenue at a clip of 23% next year, and in keeping the debt stock stable at just above 90% of GDP through 2023, it said.

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