By IANS,
New Delhi: Growing budgetary deficit and weaknesses in its public finances could weaken India’s sovereign creditworthiness, said global ratings agency Fitch in a statement Thursday.
Noting that its slowing economy was met with two supplementary budgets in 2008-09, Fitch said this not only contributed to lower tax receipts but also led to a “dramatic increase” in consolidated government deficit that last fiscal jumped to over 10 percent of India’s domestic output or GDP, from around 6 percent the previous year.
According to Fitch, last year’s fiscal outturn marked the “definitive end of a six-year trend decline in the deficit based on strong revenue growth, but very little progress in curtailing expenditure”.
Observed James McCormack, head of Asia Sovereigns at Fitch: “While current economic conditions are prompting many governments to undertake counter-cyclical stimulus measures, the recent deterioration in India’s fiscal position accentuates underlying structural weaknesses in public finances that, if unaddressed, could undermine sovereign creditworthiness.”
Fitch said the new government would likely provide additional fiscal stimulus, resulting in the government deficit exceeding 10 percent of GDP for the second consecutive year.
Moreover, it said, its debt-GDP ratio could increase to a record high of 82 percent. This means, as much as 82 percent of what the nation produces would be necessary to repay what the government owes.
Fitch said the new government faced considerable challenges in balancing the need for short-term stimulus measures to counter the economic downturn and the need for establishing a sustainable medium-term path for public finances.
The rating agency estimated Indian GDP growth to be around 6.5 percent in 2008-09 after averaging a 9 percent growth for the past few years, and predicted this would slow down to about 5 percent in the current fiscal.
The primary reasons, Fitch said, are recession in advanced economies and the sharp reduction in capital flows to emerging markets such as India.
It said the next fiscal’s budget would be shaped in part by the 13th Finance Commission’s recommendations to be published October-end, adding that the Commission would likely focus on food and fuel subsidies as well as infrastructure spending.
In addition, Fitch expected the Commission to address the issue of “off-budget” or “below-the-line” expenditures, as their inclusion in budgeted spending would enhance fiscal transparency.
The agency said the Commission could also consider revisions to the amended Fiscal Responsibility and Budget Management Act of 2003, which identified fiscal targets that have not been met.