India's fiscal deficit could be reduced to 6.6 percent of GDP in FY22 due to greater revenue growth, according to Fitch

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Even if the planned disinvestment objective is not fulfilled, the Centre could improve its fiscal deficit to 6.6 percent of GDP this fiscal year, according to Fitch Ratings, because of stronger-than-expected revenue buoyancy. The international rating agency kept India's sovereign rating at 'BBB-' with a negative outlook, saying that the risks to the country's medium-term growth prospects are shrinking as the economy recovers quickly from the pandemic and financial sector pressures ease.

Implementation of a credible medium-term fiscal strategy to reduce the debt load and increase medium-term investment and development rates without creating macroeconomic instability, perhaps from effective structural adjustment execution and a healthier finance system, are the two important positive causal factors that might ultimately lead to a modification of the viewpoint to stable. They predict the government to run a deficit of 6.6% of GDP this fiscal year, owing to higher-than-expected income growth. Their projections presume the government will miss its divestment budget goal.

The fiscal deficit, or the difference between the Centre's expenditure and revenue, was fixed at 6.8% of GDP, or Rs 15.06 lakh crore, in 2021-22 (April-March) Budget, which was announced on February 1. The fiscal deficit reached 35% of budget expectations at the end of September, six months into the fiscal year. The government's tax-collecting fund would exceed budget forecasts this fiscal year, according to Revenue Secretary Tarun Bajaj, thanks to strong direct and indirect tax collection. Indirect taxes have reached about Rs 6 lakh crore, including refunds, as of October. Though they have provided significant relief in indirect taxes such as petrol, diesel, and edible oil, there have also been some sunsets in customs charge, with a total benefit of around Rs 75,000-80,000 crore. 

Nonetheless, they believe they should go above and beyond the planned projections for both direct and indirect taxes. In terms of disinvestment, the mop-up so far totals Rs 9,330 crore, compared to a budgeted aim of Rs 1.75 lakh crore. They don't have a set timeline for addressing the negative outlook, which might lead to a rating downgrade or a stabilization of the viewpoint at its current level. 

They usually try to address such forecasts within two years, but it sometimes takes longer. They want India's sovereign rating to be reviewed twice a year. In FY21, India's general government debt reached 89.6% of GDP. Fitch expects the ratio to fall slightly to 89 percent in 2021, although it will still be significantly above the 60.3 percent 'BBB' norm. According to the rating agency, the debt ratio should drop to 86.9% by FY26 (ending March 2026). The two important positive events could cause the outlook to be revised to steady. First, establish a credible medium-term fiscal strategy to reduce post-pandemic general government debt to levels comparable to those in the 'BBB' category.  

Second, better medium-term investment and growth rates without causing macroeconomic imbalances, as a result of successful structural reforms and a healthier financial sector. Zook also stated that these triggers will be evaluated in the upcoming assessments. Negative triggers, on the other hand, might lead to a downgrade, such as a failure to reduce the general government debt-to-GDP ratio or a structurally lower real GDP growth outlook, for example, due to continuing financial-sector difficulties or a lack of reform implementation.

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