S&P calls India's fiscal deficit target 'reasonably ambitious'

The Dollar Business Bureau

"The negative effects of India's demonetisation on economic activity have begun to reverse. However, it is still far from returning to pre-November 2016 trends," a report from S&P Global Ratings revealed.

Earlier, the global rating agency had predicted a disruptive impact of the note-ban in rural areas, unorganised sector, and other businesses that run on cash. It had also, like IMF, revised its growth forecast for India to 6.9%, a revision of one full percentage point downwards. IMF has given a worse estimate of 6.6% in 2016-17. This revision by international rating agencies was done to take into account the economic disruption and slowdown caused by demonetisation.

The fiscal deficit target of 3.2% for 2017-18, as announced by FM Arun Jaitley in the budget, was labelled 'reasonably ambitious' in the APAC Economic Snapshots report. India stood by a strong and conservative fiscal policy, narrowing previous year's target of 3.5% further, which is just what S&P had said it would like India to do before the Budget.

The S&P report also mentioned relative easing of inflation in January, mainly due to low prices of fuel and food. The receding inflation is attributed to shortage of cash in the economy, leading to a glut in supply, especially of agricultural produce. RBI, to the surprise of many in the business community, despite the favourable inflation numbers, has shifted its stance from 'accommodative' to 'neutral'. The apex monetary authority has kept the 6.25% repo rate on hold for two consecutive policy meetings.

In response to Chief Economic Advisor (CEA) Arvind Subramaniam's criticism of S&P's rating parameters, the ratings agency had said that the key constraints to India's rating upgrade were a high debt to GDP ratio, low per capita GDP, and a sluggish private investment environment. S&P has refused to upgrade India's ratings for 2017, stating that India is unlikely to achieve a debt to GDP ratio below 60%. Currently, the debt to GDP ratio stands at 68.5%. S&P's ratings of India have been held at BBB- with a stable outlook.