The story so far: In the Union Budget for 2022-23, the Government has ramped up its capital spending plans to a record 2.9% of the GDP to revive the economy, with an ambitious borrowing plan and a target to reduce fiscal deficit level to 6.4%. Rating agencies, concerned about India’s heightened general government debt levels (adding up States’ debt with that of the Centre’s), have reacted with cautious scepticism about the roadmap for correcting India’s fiscal math in the next few years, which has not gone down well with the Finance Ministry.
What was the target?
In the pandemic-shock year of 2020-21, the Union Government’s fiscal deficit —or the gap between expenses and earnings —had expanded to 9.2% of GDP as the COVID-19 lockdowns necessitated greater spending on healthcare and minimal welfare support for the most vulnerable. The Government had hoped to correct that metric to 6.8% in 2021-22, but is now expected to end the financial year with a deficit of 6.9% of the GDP. The 15th Finance Commission had recommended that the Government’s deficit for 2022-23 should be contained at 5.5% of the GDP under a slow recovery scenario, with a target to achieve a deficit level of 4.5% of the GDP by 2025-26. Finance Minister Nirmala Sitharaman had, in Budget 2021-22, agreed to the 2025-26 target.
What have global rating agencies said about the Budget?
Moody’s Investors Service termed the Budget a ‘credit positive’ for India’s sovereign rating but added that the path toward the Government’s medium-term deficit target is ‘undefined’, even as general government debt would increase to around 91% of GDP next year. Fitch Ratings, which has a negative outlook on India’s sovereign rating of BBB-, its lowest investment grade rating, said the Budget was short on major growth-enhancing structural reform plans, had no new revenue generation ideas, and the fiscal deficit target is higher than the 6.1% it anticipated.
While the fiscal deficit targets were higher than most agencies estimated, they acknowledge the Centre’s capital expenditure bet and stressed that outcomes of such spending would be critical. From a ratings perspective, India has limited fiscal space with the highest general government debt ratio among any similarly rated emerging markets, Fitch Ratings director Jeremy Zook said, stressing that the negative outlook on India can only be reversed if high growth can help claw back these debt levels.
Fitch also shared Moody’s worries about the medium-term fiscal outlook, noting that the Budget offered ‘less clarity’ and ‘few details’ on how the 4.5% of GDP fiscal deficit target will be achieved by 2025-26.
How has the Finance Ministry reacted?
Top finance ministry officials have questioned rating agencies’ assertion that the fiscal consolidation roadmap to 2025-26 is undefined. “The glide path to reach a deficit of 4.5% of GDP in 2025-26 with an approximately even path of consolidation is already provided in last year's Budget and this Budget reiterates we are committed to that path,” Finance Secretary T.V. Somanathan said.
While this entails a roughly 0.6% annual reduction in the deficit in the coming years, he pointed out that the deficit could go down faster if growth comes back. Mr. Somanathan said that agencies’ comments on India having the highest debt among emerging economies, reeked of double standards. “Our debt to GDP ratio is far lower than the U.S., Japan, and other such highly rated countries in Europe, while our growth tends to be faster than them even in the worst of times.
So our deficits are far less worrying than some of them,” he emphasised. Revenue Secretary Tarun Bajaj said while the tax on crypto assets is a new tax, introducing new taxes every year is also considered a negative by global investors. Rating agencies can be unreasonable at times, he noted.
How do independent economists assess this debate?
While it is true that India’s public debt level at around 90% of GDP is less than Japan, where it is 256%, and the U.S. (133%), Professor Gurbachan Singh, visiting professor at the Indian Statistical Institute, New Delhi, said the comparison is a tad misleading.
“The more appropriate metric is debt to taxes ratio, which is extraordinarily high in India,” he said at a Budget discussion hosted by the Indira Gandhi Institute of Development Research this Friday. “Interest payments, another yardstick for debt levels, are expected to take up over 45% of the Centre’s revenue receipts in 2021-22,” Mr. Singh noted.
While high borrowings to finance the recovery from the COVID-19 mess are understandable and mirror several countries’ policy response, servicing this high debt over the years also imposes a burden on future generations who will not only have to pay off those loans, but also may be left with limited headroom for fresh spending.
