High fiscal deficit may invite rating agencies' ire

Mumbai : Global rating agencies may view the fiscally expansive budget proposals 'negatively' and there is a risk of one of them downgrading India's sovereign rating, a Japanese brokerage said on Friday.

Fitch Ratings, one of the two having a negative outlook on India's rating, may downgrade the rating to junk, Nomura warned. In a move widely hailed for its transparency, Finance Minister Nirmala Sitharaman on Monday said the fiscal deficit (FD) will come at 9.5 per cent on the back of high spending during the pandemic, and will narrow to 6.8 per cent in FY22.

It can be noted that the country was on a path to get the gap to 3 per cent in the medium term earlier. "…We believe rating agencies may view the budget as slightly more negative, given their focus on medium-term fiscal finances. Of the two rating agencies with a negative outlook for India, we believe the budget may have increased the probability of a downgrade from Fitch," the note from Nomura said.

The positives in the budget from the rating agencies' perspective include creation of a bad bank to house dud debt, increased infrastructure spending, realistic assumptions and greater fiscal transparency, while there are a few negatives as well like weak medium-term fiscal commitment and larger size of the government, it said. In a note released hours after the Nomura report, Fitch indeed flagged risks over the fiscal roadmap from the medium term perspective.