In its first Budget since the Covid-19, the government has set a significantly higher fiscal deficit target of 6.8 of GDP for FY22 on the back of a 9.5 per cent gap in FY21. Nomura had earlier estimated the gap at 6.8 per cent for FY21 and 5.3 per cent for FY22.
“We think part of this reflects ‘kitchen sinking,’ as the government has moved towards greater transparency and shifted below-the-line food subsidy to above the line. Hence, the ‘true’ fiscal deficit stands at 8.1 per cent of GDP in FY21 and 6.1 per cent in FY22, still above market expectations,” it said.
That said, at the margin, rating agencies may view the Budget slightly more negatively, 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 by Fitch,” Nomura said.
The Economic Survey presented in Parliament last week had expressed concern over lower sovereign ratings assigned to India by agencies like Fitch, S&P and Moody’s despite its strong economic fundamentals. India will have to persistently make efforts to improve its sovereign ratings by different global agencies in line with its economic fundamentals, Chief Economic Adviser K V Subramanian said on Saturday.
The Survey had slammed the methodology used for sovereign credit ratings and suggested a need to amend them to reflect economies’ ability and willingness to pay their debt obligations. Developing economies must come together to address this bias and subjectivity inherent in the sovereign credit ratings methodology, the Survey had suggested.
RBI, which is going into its money policy review huddle on Tuesday, meanwhile, is likely to view the Budget as a medium-term positive, Nomura India said. It expects a dovish ‘hold’ and a pushback on market expectations of liquidity normalisation.
“RBI also has its task cut out to ensure that the borrowing programme is smooth. However, with the return of fiscal activism, the baton of driving growth has passed from monetary policy to fiscal policy. We expect early steps on policy normalisation to begin later in the year,” it said.
Nomura said the Budget had a few positives such as bad bank, infrastructure spending, realistic assumptions and greater fiscal transparency and a few negatives such as a weak medium-term fiscal commitment.