July 11, 2014 / 2:04 AM / in 4 years

Fitch: India Budget Targets are Credit Positive; Execution Key

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, July 10 (Fitch) The fiscal and economic targets included in India's FY14/FY15 interim budget would be constructive for the sovereign credit if achieved, says Fitch Ratings. However, the government's objectives of returning growth to 7%-8% within three years and maintaining a tight fiscal consolidation path look ambitious. Uncertainties and risks remain regarding implementation of key policies necessary to achieve both the growth and fiscal deficit targets. Finance Minister Arun Jaitley has maintained the previous government's budget deficit targets of 4.1%, 3.6% and 3.0% of GDP in FY15, FY16 and FY17, respectively. This compares with Fitch's deficit forecasts of 4.6%, 4.1% and 4.0% over the same period. Fitch is unsure how the government's target path can be met without further revenue-strengthening or expenditure-saving measures - notably, the current budget's specific tax measures actually reduce intake . Mr Jaitley has stated that fiscal consolidation is to be led by revenue, highlighting the introduction of a new goods and services tax (GST), crackdown on the shadow economy, and higher tax revenues from stronger economic growth. However, there are implementation risks to these policies. The GST will need agreement at the state level, and it remains to be seen how the new tax will look after negotiations. The budget divestment target of INR634.2bn looks ambitious relative to figures of about INR258bn in both FY13 and FY14. The FY14 divestment undershot an initial budgeted amount of INR558bn. A further fiscal risk could lie in the government's pledge to recapitalise public sector (PSU) banks. The budget included an investment of INR2.4trn (2% of FY15 GDP) in PSU lenders between now and FY19. This is broadly in line with Fitch's own estimates, but it could be a source of fiscal slippage over the medium term if banks' balance sheets turn out to be in a worse condition than currently thought. However, even some slippage relative to the government's objectives for the deficit and growth would not necessarily put negative pressure on the ratings. Public debt ratios are projected to drop out to FY17 even under Fitch's more cautious growth and fiscal projections. The new government, as generally expected, placed an emphasis in its first budget on improving access for foreign capital and incentivising investment. Foreign investment caps in the defence and insurance sectors are being raised to 49% from 26% while the urban construction sector is also being opened to foreign direct investment. The government also pledged to examine the issue of retroactive tax claims which had hurt foreign investor sentiment under the previous administration. Contacts: Andrew Colquhoun Senior Director Sovereigns Fitch (Hong Kong) Limited 2801 Tower Two, Lippo Centre 89 Queensway Hong Kong Justin Patrie Senior Director Fitch Wire +65 6796 7232 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: India here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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