The pace of India’s fiscal consolidation is vital to the country’s prospects of a ratings upgrade, Standard & Poor’s told Reuters on Wednesday, flagging its concerns over high and rising debt levels.
The comments from S&P’s India analyst Kyran Curry come as Finance Minister Arun Jaitley faces pressure to cut taxes and hike spending in his annual budget next week – even at the cost of an earlier promise to trim the fiscal gap to 3 percent of GDP in 2017/18 from the 3.5 percent budgeted this year.
Curry said India needed to make greater efforts to quickly lower the country’s sovereign debt-to-GDP ratio to below 60 percent to boost its case for an upgrade. While India’s government debt is largely domestically held, the debt-to-GDP ratio, at 66 percent, is high for an emerging-market economy.
“What we mainly focus on is the change in the pace of the debt accumulation and the debt stock,” Curry said in a telephone interview. “And for the moment, they remain quite high.”
S&P last November affirmed India’s rating at “BBB-minus” with a “stable” outlook, putting Asia’s third-largest economy at the bottom rung of investment grade despite calls for an upgrade by government officials.
Ahead of the annual budget, due to be delivered on Feb. 1, a government-appointed panel has advocated pursuing an expansionary fiscal policy to sustain growth in difficult circumstances, opening a window for higher capital spending to ease the pain from the government’s decision to scrap high-value banknotes.
Curry, however, said that India’s economic growth remained “very strong” despite the fallout from the banknote ban, and the government would do well to avoid pursuing an expansive fiscal policy.
“We would say that the government has limited scope to provide fiscal stimulus because its balance sheet is stretched already,” he said.