Fitch said loosening of fiscal policy to support the country’s economic recovery from the COVID-19 pandemic will lead to a rise in public debt.
Global ratings agency Fitch said on February 10 that Finance Minister Nirmala Sitharaman’s Union Budget 2021-22 has the potential to lift growth prospects, called the Centre’s fiscal roadmap “credible”, and singled out “positive” announcements like a new ‘bad bank’ and bringing previous off-Budget items into the Budget.
“In aggregate, the 2021 budget has the potential to lift growth prospects. Higher expenditure will support the near-term recovery and increased infrastructure spending could boost sustainable medium-term growth rates,” Fitch said.
“Although there are implementation risks around aspects of the Budget, we regard the government’s overall fiscal projections as broadly credible. The Budget’s higher deficit forecasts are partly driven by positive steps toward greater transparency, as previously off-balance-sheet items, such as loans from the Food Corporation of India, have been brought on Budget,” it said in a note.
Fitch said the announcement of an asset reconstruction company and an asset management company to deal with non-performing assets (NPAs) should be credit positive and added that plans to privatise two state banks could also be significant, but would require changes to the Bank Nationalisation Act, which would add to implementation challenges.
However, Fitch’s assessment of the Budget was not all positive.
“We believe the proposed injection of Rs 20,000 crore ($ 2.7 billion) of new capital into state banks will be insufficient to alleviate the anticipated incremental stress on capital levels in 2021 and 2022. State-run banks are likely to continue to experience asset-quality problems, weak profitability and small capital buffers and, as a result, we project credit growth to remain soft in the absence of further government action,” it said.
Fitch also said loosening of fiscal policy to support the country’s ongoing economic recovery from the COVID-19 pandemic will consequently lead to a rise in public debt.
“We now expect public debt to rise above 90 percent of GDP over the next five years, based on the Revised Budget targets and with our other previous rating assumptions remaining unchanged. However, recent reforms and policy measures, including those announced in the Budget, could also influence our growth expectations and, thus, our debt trajectory forecasts,” it said.
