The Union Budget 2016-17 is credit positive, however, the reforms implementation agenda in various sectors as well as achieving revenue growth target remain uncertain, Fitch Ratings said today.
“India’s latest Budget for the 2016-17 fiscal contains a number of elements that could be a positive from a sovereign rating perspective over the medium-term. However, uncertainties regarding implementation of the reform agenda and meeting targeted revenue growth remain”, Fitch Ratings said in a release.
It said the policy agenda for reform and consolidation are credit positive, but implementation risks remain significant.
“Many key structural reforms, such as the Goods and Services Tax, still require the passage of legislation through parliament, which is not guaranteed. Furthermore, the 3.5 per cent deficit target is partly based on an acceleration of revenue growth to 14 per cent in 2016-17 from 9 per cent in 2015-16,” it said.
The overall revenue target seems broadly achievable, but depends on economic growth in an uncertain external environment and includes a target for asset sales that may be optimistic, it added.
Revenue growth will be supported by a number of tax measures though, including increased excise duties on tobacco and taxes on luxury cars.
The Budget, presented by Finance Minister Arun Jaitley in Parliament yesterday, underscores government’s continued commitment to gradually broaden the ambitious reform agenda.
Reforms in financial sector, agriculture and liberal FDI regime indicated the government’s vision on structurally improving the economy and create sustainable growth, it said.
“Fitch maintains that improving the relatively weak business environment through structural reforms that would support investment and real GDP growth is a key factor that would be credit positive.”
Besides, government’s fiscal credibility was supported with the budget maintaining the previously communicated deficit target of 3.5 per cent of GDP for next fiscal, as well as by the central government meeting its deficit target of 3.9 per cent in current fiscal in present fiscal.
It said the proposal to review the Fiscal Responsibility and Budget Management Act (FRBM), which was passed in 2003 to improve long-term fiscal stability could result in watering down of fiscal discipline, but could also be an opportunity to strengthen and improve fiscal balances over the long run.
“Public finances remain a key rating weakness for India with both its general government debt and deficit much higher than the median of its ‘BBB’ peers.
“General government debt at 69 per cent of GDP is the highest of all ‘BBB’-rated sovereigns”, said the ratings firm.