7th Pay Commission award: Rating agencies sound a warning on fiscal targets
NEW DELHI: Ratings agency Fitch on Friday said that the Seventh Pay Commission award could force the government to again amend the fiscal consolidation roadmap and further delay the targeted rate of 3% of GDP, warning that this may weigh on the country’s credit rating. CRISIL said there will be adverse fiscal and inflationary implications but not as much as when the Sixth Pay Commission was implemented.
The current fiscal consolidation roadmap sees the fiscal deficit declining to a sustainable 3% of GDP by 2017-18, a year later than the target set by the UPA government in 2012. Finance minister Arun Jaitley amended the target in the budget for 2015-16 to stretch the goal by one year. In a statement, Fitch said that “the government could yet amend its medium-term targets and further delay achieving a deficit of 3.0% of GDP, currently targeted for FY18. The fiscal consolidation plan was postponed by one year in the last budget.” The government has set a fiscal deficit target of 3.9% of GDP in the current fiscal and 3.5% of GDP in 2016-17.
“As such, the planned wage increase is sufficient to add substantive challenges to achieving the planned medium-term consolidation targets,” Fitch said, warning of its impact on the ratings profile of the country. Fitch has a stable outlook on India’s BBB- rating.
“Delaying an improvement in India’s fiscal position would underscore a longstanding weakness for the sovereign credit profile,” it said, adding that the country’s general government debt burden of close to 65% of GDP is the highest among ‘BBB-‘ rated countries. “The ‘BBB’ category median is 43% of GDP,” it said.
India Ratings, a Fitch associate said, “Yet at a time when the government is pursuing the path of fiscal consolidation, this will pose a serious challenge for the government in terms of not deviating from the fiscal deficit targets as announced in the FY16 budget.”
Fitch said the government could cut spending elsewhere and there is some room on the subsidy side. However, it said, capital spending cut will be undesirable as “investments are planned to play a key role in its efforts to stimulate the economy”.
In such a situation, Fitch said fiscal consolidation targets will be realised only if the government can mobilise higher revenues.
“An expected pick-up in real GDP growth will help, and increasing government employee wages should stimulate consumption,” the agency said, striking a positive note, but it was not too hopeful of an immediate pick up in revenues.
It further said, “The government is also rolling out a number of reforms to improve the business environment, but there has yet to be any reform or policy initiatives that Fitch expects would lead to a structural increase in government revenues.” However, it was confident that the target for the current fiscal will be achieved.
“The government will have to shore up revenue collections to ensure fiscal targets are not met through capital expenditure cuts – as had happened in the past,” CRISIL said in a note.
Read full article: Economic Times
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