Rating agencies have demurred from passing any scathing comments on the greater than expected fiscal deficit announced in the budget just days after the Narendra Modi-government dared them on downgrades in the Economic Survey last week.

Fitch Ratings and Standard & Poor’s on Tuesday came out with their initial reaction to the budget and it did not indicate any major concern on their part about the government’s decision to set fiscal deficit at 6.8 per cent of GDP in the next fiscal while keeping the deficit at an awning 9.5 per cent for the current fiscal.

The Centre has also decided to throw away any figleaf of fiscal rectitude by jettisoning the mandate to attain the fiscal deficit of 3 per cent of GDP by 2020-21 under FRBM Act even as it committed itself to an aggressive spending exercise that removes the possibility of bringing down the deficit to below 4.5 per cent of GDP in another four years.

At present, India’s sovereign rating is one notch above junk, and any downgrade will increase borrowing costs both for the government and companies.

In June last year, Fitch had revised India’s outlook to negative from stable and affirmed the rating at BBB- while Moody’s had downgraded the rating to Baa3 from Baa2, the lowest investment grade. On the other hand, S&P has a BBB- rating.

S&P Global Ratings on Tuesday said that the fiscal deficit of 9.5 per cent of GDP in this fiscal was greater than its estimates. It cautioned that the prospect of consolidation from these levels, while maintaining a significant degree of support for the economy, poses a “stout” challenge to India’s policymakers. The rating agency was, however, quick to add that the budget represented a comprehensive effort by the government to shore up the country's nascent economic recovery.

“While we currently see no material effect from the budget on India’s key credit factors, the economy’s brightening growth prospects will be critical to maintaining the sustainability of India’s public finances, with general government debt likely to hover at more than 90 per cent of GDP over the next few years,’’ the rating agency noted.

On the other hand, Jeremy Zook, director in Fitch Ratings’ Asia-Pacific Sovereigns team, said that the deficit targets presented in the budget are higher even as the medium-term consolidation is more gradual than expected.

“The wider deficits and more gradual pace of consolidation will lift government debt and put more onus on the nominal GDP growth outlook in our assessment of the medium-term debt trajectory, which is core to our view of sovereign rating,” Fitch said.

Signs of a weaker-than-anticipated economic recovery or a reassessment of medium-term growth potential would make it more challenging to achieve a downward trend in the debt ratio.

“We view the economic and revenue assumptions underpinning the budget to be largely credible, although the disinvestment revenue target appears optimistic at over three times higher than the level achieved in 2019-20.”

“This budget also takes further positive steps toward improving fiscal transparency, particularly by bringing the loans from the Food Corporation of India (FCI) onto the budget,” Fitch said.

The extended fiscal glide path — in the government’s refusal to keep the deficit high till 2025-26 — means the present dispensation has given a quite a burial to late finance minister Arun Jaitley’s promise in his budget for 2017 to strive for fiscal prudence even as he refused to trigger the escape clause from the mandated glide path of the deficit.

Sitharaman has not only activated the escape clause this year but also promised to amend the FRBM Act.
Chief economic advisor K.V. Subramanian in the Economic Survey had set the stage for the ballooning fiscal deficit and the long rope for the glide path when he slammed the methodologies of the rating agencies.

“India's sovereign ratings do not reflect the fundamentals of Indian economy. Ratings methodology needs correction. Ratings basically reflect the probability of default which corresponds to willingness to repay or ability to repay. India's willingness to repay is gold standard,” the survey said.

India has never defaulted even in 1991. Our ability to repay is also very very high," Subramanian said.

Pointing towards India's bulging foreign exchange reserves to make the case for a significant ratings upgrade, he said the reserves currently stand at $585 billion, which is close to all time highs.

"To understand whether our reserves cover our debt, we need to take into account private sector debt. Our short term debt, a default by India is a 0.1 percent probability event," he said. "Our total debt obligation in foreign exchange, the amount is less than reserves….which is why India should have the highest rating. And that is one of the reasons why our stock markets do not react to (adverse) credit ratings changes," he said.