New Delhi, Feb 3 : Global rating agencies may view Indias fiscally expansive Budget proposals “negatively” and there is a risk of one of them downgrading India’s sovereign rating, as per Nomura.
The Japanese brokerage said that Fitch Ratings, one of the two having a negative outlook on India’s rating, may downgrade its rating to junk.
“We believe rating agencies may view the Budget proposals as slightly more negative, given their focus on medium-term fiscal finances. Of the two rating agencies with a negative outlook for India, we believe the Budget may have increased the probability of a downgrade from Fitch,” a note from Nomura said.
In its post Budget outlook, Fitch has indicated that the debt ratio would put pressure on the rating.
“The wider deficits and more gradual pace of consolidation will lift India’s government debt and put more onus on the nominal GDP growth outlook in our assessment of the medium-term debt trajectory, which is core to our view of India’s sovereign rating. Signs of a weaker-than-anticipated economic recovery or a reassessment of medium-term growth potential would make it more challenging to achieve a downward trend in the debt ratio under our forecasts and add to pressure on the rating,” it said.
Fitch said the deficit targets presented in the Union Budget on February 1 are higher, and medium-term consolidation more gradual than expected.
“We placed India’s ‘BBB-‘ rating on negative outlook in June 2020, in recognition of the pandemic’s impact on growth prospects and the challenges of the high public debt burden,” it said.
The government’s prioritisation of fiscal support for the population’s health and well-being, and ongoing economic recovery are understandable, it said.
“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). The Budget forecasts wider near-term deficits of 9.5 per cent of GDP in FY21 and 6.8 per cent in FY22 and a more gradual pace of consolidation than we had previously anticipated, reaching 4.5 per cent only by FY26,” Fitch said.