World Economy

S&P Urges India to Cut Fiscal Gap

S&P Urges India to Cut Fiscal GapS&P Urges India to Cut Fiscal Gap

Standard & Poor’s urged Indian Finance Minister Arun Jaitley on Wednesday to maintain the pace of fiscal consolidation in the annual budget next week and quickly reduce the country’s debt stock to bolster the prospects of a ratings upgrade.

The call from S&P’s analyst Kyran Curry comes as Jaitley faces pressure ahead of his fourth budget on Feb. 1 to cut taxes and hike spending–even at the cost of an earlier promise to trim the fiscal gap to 3% of GDP in 2017/18 from the 3.5% budgeted this year, Reuters reported.

The ratings agency last November rebuffed New Delhi’s pitch for an upgrade, citing weak public finances. It affirmed India’s rating at “BBB-minus” with a “stable” outlook, putting Asia’s No. 3 economy at the bottom rung of investment grade.

Curry reiterated those concerns, saying the pace of India’s debt accumulation and the debt stock remained “quite high”. While India’s debt-to-GDP ratio has improved to around 66% from 79.5% in 2004-05, it remains elevated for an emerging-market economy.

Curry wants it to fall below 60% over the next three years to warrant an upgrade. But a slowdown in fiscal consolidation in the upcoming budget would, he said, make that a remote prospect.

“It would more or less defer any further upside to the ratings,” Curry told Reuters in a telephone interview. “It would just delay a more positive credit assessment in our outlook.”

Jaitley is expected to try and ease the economic pain caused by Prime Minister Narendra Modi’s decision late last year to scrap old high-value currency bills ahead of voting in five state elections, including the swing state of Uttar Pradesh. The outcome of the vote will be key to Modi’s chances of winning a second term in 2019.

Seeking to shore up support, Modi unveiled incentives to the poor, farmers, women and small businesses in an address to the nation on new year’s eve. Jaitley is expected to follow those with more budget giveaways.

Curry, however, said India’s economic growth remained “very strong” despite the fallout from the banknote ban, and the government would do well to avoid pursuing an expansionary fiscal policy.


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