Budget 2016: Rating agencies pick holes; S&P says no revision for 2 years

By: | Published: February 29, 2016 10:58 PM

Global rating agency Standard & Poor's has said the Budget contains a number of positives but the roadmap for fiscal consolidation is tepid and there was no room for any positive action in the next two years.

"The Budget has made limited progress in fiscal consolidation and it only modestly reduces the vulnerabilities associated with the low per capita income and weak public finances," said S&P. (AP)“The Budget has made limited progress in fiscal consolidation and it only modestly reduces the vulnerabilities associated with the low per capita income and weak public finances,” said S&P. (AP)

Global rating agency Standard & Poor’s has said the Budget contains a number of positives but the roadmap for fiscal consolidation is tepid and there was no room for any positive action in the next two years.

Its grouse arises from the fact that the Finance Minister has stuck to the fiscal deficit target announced last year at 3.9 per cent for this fiscal and 3.5 per cent for the next, skipping an incremental roadmap.

While Moody’s and Fitch remained silent on the rating side, the largest of the three S&P was very vocal in saying the Budget does not make them change their rating outlook either this year or next.

S&P while welcoming the Budget in general said the proposal on the fiscal side shows only limited progress and ruled out any changes in rating outlook for next two years.

“The Budget has made limited progress in fiscal consolidation and it only modestly reduces the vulnerabilities associated with the low per capita income and weak public finances,” S&P credit analyst Kyran Curry said in a note.

“Without marked improvements in the general government’s fiscal outturns and accompanying declines in net debt, we do not expect to change our rating on India (BBB-/Stable) this year or the next,” Curry added.

“Government’s debt burden and subsidy spending continue to significantly constrain its fiscal policy options,” said Curry, adding “interest payments and subsidies account for almost 40 per cent of total budgetary expenditure.”

Thomas Rookmaaker, director at Fitch’s Asia-Pacific sovereign group said, even the announced “fiscal target is subject to substantial uncertainty and the 3.5 per cent target looks challenging” considering the tepid revenue growth projections for the next fiscal.

Moody’s on the other hand said “from a sovereign credit perspective, it wants to know whether the trend of falling annual fiscal deficits would be maintained in FY16 estimate and FY17 target?”

It also posed queries on how the allocation of government resources towards civil servant pay hikes, and bank recapitalisation would affect FY17 budget targets apart from questioning whether new measures to address the structural challenges over the medium term would be introduced?

“As expected, fiscal consolidation will be gradual, challenging and vulnerable to adverse economic trends,” Moody’s said adding the Rs 25,000-crore allocated for bank recapitalisation is not as high as market estimated.

Moody’s also noted that none of the several measures announced in the Budget on the revenue and expenditure fronts, heralds a structural shift in the fiscal or macroeconomic framework.

“The Budget target appears to recognise that pressures on the expenditure side are mounting, given the significant costs of funding government employee wages and benefits, as well as bank recapitalisation costs,” Moody’s said and warned that whether the FY17 deficit target will be met will depend on the extent to which direct and indirect revenue recovers–whether corporate profitability and rural consumption recovers and on the weather patterns.

“A third year of weak monsoons would likely weaken growth and fiscal trends,” it warned.

On the rating side, Fitch’s Rookmaaker said from a rating perspective, the budget contains a number of positive elements, even though it is subject to substantial uncertainty.

“Firstly, the government continues to gradually broaden its ambitious reform programme and like last year, this Budget contains some further announcements of reforms, including measures related to the FDI regime, the financial sector and agriculture.

“Even though it may not always be easy to pass all the proposed laws in Parliament, the government has a vision of how to structurally improve the economy and it seems to do what it can to achieve this vision,” Rookmaaker said.

On the fiscal front, he noted that fiscal credibility is supported by the government meeting its budget deficit target of 3.9 percent for FY16, and bring it down to 3.5 percent in FY17.

On the projected 14 per cent increase in revenue growth in FY17 from 9 per cent in FY16, he said this is subject to substantial uncertainty related to GDP growth, the massive hike in excise duties may be give some breather.

Rookmaaker also warned that the plan to set up a panel to review the working of the FRBM Act has the potential to cause future watering down of fiscal discipline, but it could also be an opportunity to improve the fiscal balances in the long-run.

“The country’s fiscal balances are weak compared with its peers, as the general government debt of some 69 per cent of GDP is the highest of all sovereigns rated in the ‘BBB’ category,” Rookmaaker said.

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