‘India’s weak fiscal position to remain a key credit challenge’

Budget 2021 Numbers more credible achievable than previous years says India Ratings

"Deficit targets presented in India's central government budget on February 1 are higher, and medium-term consolidation more gradual, than we expected", Jeremy Zook, director Fitch Ratings' Asia-Pacific Sovereigns team said in a note on Tuesday.

"At the same time, however, there is little fiscal space given India's high public debt ratio prior to the virus shock (around 90 per cent of GDP compared to the 53 per cent 2020 "BBB" median)". For FY21, the fiscal deficit was pegged at 3.5% in the Budget announced in February previous year.

In her Budget speech at Indian parliament's lower house Lok Sabha, Sitharaman said, "The fiscal deficit in Revised Estimates 2020-21 is pegged at 9.5 percent of the GDP".

We feel that while higher growth will lead to higher savings, the same could fund increased government expenditure.

This was funded through government borrowings, multilateral borrowings, among others, she said, adding that the government needed another Rs 80,000 crore for which it would be approaching the market in the next two months.

According to her, the fiscal deficit in Budgetary Estimates for 2021-2022 is estimated to be 6.8 percent of the GDP.

Sitharaman said the gross borrowing from the market next year would likely be Rs 12 lakh crore.

Sitharaman further said, "We hope to achieve the consolidation by first, increasing the buoyancy of tax revenue through improved compliance, and secondly, by increased receipts from monetisation of assets, including Public Sector Enterprises and land".

It said it will take a long time for the economy to heal from the pandemic.

The govt now aims to reach below 4.5 percent by FY26 in a steady manner. The minister also announced the exemption from tax audit limit doubled to Rs 10 crore turnover for companies doing most of their business through digital modes.

The finance ministry also proposed to increase the foreign direct investment limit in the insurance sector from the existing 49% to 74%. The government has also projected a deficit of 6.5 per cent for the next fiscal year starting April and said it would reach 4.5 per cent only by fiscal 2025/26.

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