Explained | Why does the Center disagree with ratings agencies’ skepticism about India’s plan to correct its budget calculations?

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The story so far: In the Union budget for 2022-2023, the government has increased its capital expenditure plans to a record 2.9% of GDP to revive the economy, with an ambitious borrowing plan and a target of reduction in the level of budget deficit to 6.4%. Rating agencies, concerned about India’s high level of public debt (adding state debt to that of the Centre), reacted with cautious skepticism about the roadmap to correct India’s fiscal calculations. India over the next few years, which was not well received by the Ministry of Finance.

What was the target?

In the pandemic shock year of 2020-21, the Union government’s budget deficit – or the gap between expenditure and revenue – had risen to 9.2% of GDP as COVID lockdowns -19 required increased health spending and minimal social assistance for the most vulnerable. The government had hoped to correct this metric to 6.8% in 2021-22, but is now expected to end the fiscal year with a deficit of 6.9% of GDP. The 15th Finance Committee had recommended that the government’s deficit for 2022-23 be contained to 5.5% of GDP under a slow recovery scenario, with the objective of reaching a deficit level of 4.5 % of GDP by 2025-26. Finance Minister Nirmala Sitharaman had, in the 2021-22 budget, accepted the 2025-26 target.

What have global rating agencies said about the budget?

Moody’s Investors Service called the budget ‘credit positive’ for India’s sovereign rating, but added that the path to the government’s medium-term deficit target is ‘undefined’ even if general government debt would rise. to around 91% of GDP next year. Fitch Ratings, which has a negative outlook on India’s sovereign rating of BBB-, its lowest investment rating, said the budget fell short of major growth-enhancing structural reform plans, had no no new ideas for revenue generation and that the budget deficit target is higher than the 6.1% he anticipated.

While budget deficit targets were higher than most agencies estimated, they acknowledge the Center’s gamble on capital spending and stress that the outcomes of that spending would be critical. From a ratings perspective, India has limited fiscal space with the highest general government debt ratio among all similarly rated emerging markets, said Jeremy Zook, director of Fitch Ratings, pointing out that the India’s negative outlook can only be reversed if high growth can help recover these debt levels.

Fitch also shared Moody’s concerns over the medium-term fiscal outlook, noting that the budget offered “less clarity” and “little detail” on how the 4.5% of GDP fiscal deficit target will be. achieved by 2025-26.

How did the Ministry of Finance react?

Senior finance ministry officials have questioned the ratings agencies’ assertion that the roadmap for fiscal consolidation through 2025-26 is undefined. “The glide path to reach a deficit of 4.5% of GDP in 2025-26 with a roughly equal consolidation path is already foreseen in last year’s budget and this budget reiterates that we are committed to this way,” the finance secretary told TV Somanathan.

Although this implies an annual reduction of about 0.6% of the deficit in the coming years, he pointed out that the deficit could decrease more quickly if growth returns. Mr Somanathan said the agencies’ comments about India having the highest debt among emerging economies smacks of double standards. “Our debt-to-GDP ratio is well below that of the US, Japan and other highly rated European countries, while our growth tends to be faster than them, even in the worst times.

So our deficits are much less of a concern than some of them,” he stressed. Revenue Secretary Tarun Bajaj said that while the crypto asset tax is a new tax, the introduction of new taxes every year is also seen as negative by global investors. Rating agencies can sometimes be unreasonable, he noted.

How do independent economists evaluate this debate?

While it is true that India’s level of public debt, at around 90% of GDP, is lower than that of Japan, where it is 256%, and the United States (133%), Professor Gurbachan Singh, a visiting professor at the Indian Statistical Institute in New Delhi, said the comparison is a bit misleading.

“The most appropriate measure is the debt-to-tax ratio, which is extraordinarily high in India,” he said during a budget discussion hosted by the Indira Gandhi Institute for Development Research on Friday. “Interest payments, another measure of the level of indebtedness, are expected to represent over 45% of the Center’s revenue in 2021-22,” Singh noted.

While the high borrowing to fund the recovery from the COVID-19 mess is understandable and reflects the policy response of several countries, servicing this high debt over the years also places a burden on future generations who will not only have to repay these loans, but also may find themselves with limited flexibility for new expenses.

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