As the BJP-led NDA government is all set to present the final budget on Friday, Fitch Ratings on Thursday warned of a second consecutive year of fiscal slippage in the event of resorting to populist spending.
Fitch is of the opinion that the interim budget could give some indication of the government’s commitment to fiscal consolidation, which is one of the main sensitivities in the sovereign ratings.
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“The BJP has reportedly lost votes in some recent state elections due to rural distress and public concerns over job creation. Targeted cash programmes appear the most likely form of support, as they would avoid downside risks of alternatives, such as the farm loan waivers that undermined the loan repayment culture in the past,” Fitch said.
Populist spending would aggravate fiscal pressures, which are already building due to revenue shortfalls, it added.
“Higher pre-election spending could risk a second consecutive year of fiscal slippage relative to the government’s targets and would further delay plans to reduce the high general government fiscal deficit and debt burden,” it said.
Fitch said longer-term trends are more important to the sovereign rating profile. Revenue from the new GST is well below target; Fitch said citing it as a reason for revenue falling short of the target so far in the current fiscal year that ends on March 31, 2019.
Indian budgets normally offer guidance on plans for structural reforms and tax changes.
Earlier, the government’s reform efforts have led to a strong improvement in the World Bank’s Ease of Doing Business ranking in recent years, but FDI inflows have remained roughly stable.