Standard & Poor's urged 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 February 1 to cut taxes and hike spending - even at the cost of an earlier promise to trim the fiscal gap to 3 per cent of GDP in 2017/18 from the 3.5 per cent budgeted this year.

The ratings agency last November rebuffed New Delhi's pitch for an upgrade, citing weak public finances. It affirmed India'srating 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 per cent from 79.5 percent in 2004-05, it remains elevated for anemerging-market economy.

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

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

BUDGET POLITICS

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.

Economic growth strong

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 expansionaryfiscal policy.

“We would say that the government has limited scope to provide fiscal stimulus because its balance sheet is stretched already,” he said.

The International Monetary Fund last week trimmed India's growth outlook for the fiscal year beginning in April to 7.2 per cent from 7.6 per cent previously, citing the blow to the cash-reliant economy.

Questions over RBI autonomy

S&P didn't expect the note ban to weigh on economic growthin the medium-term. Yet, the rating agency remained concerned about its “disorderly” implementation, which Curry said raised questions over the Reserve Bank of India's independence.

“It casts a shadow over the predictability and effectiveness of policy making,” Curry said.

Related Topics