India’s budget a shot in the arm for economy: S&P

“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% of GDP over the next few years” said S&P

Though S&P recently revised upward iforecast for India’s real GDP growth to negative 7.7% for fiscal 2021, from negative 9.0% previously, it will take a long time for economy to heal from the pandemic.

“We estimate that GDP per capita will fall below US$2,000 in fiscal 2021, and that the broader economy will only recover to its pre-COVID output level in the next fiscal year. Nevertheless, India’s economy is clearly building momentum, and we forecast real GDP growth of 10% in fiscal 2022 as activity resumes and the country continues to reopen” the rating agency said.

Amid uncertainty over enduring pandemic-related risks, the government’s fiscal 2022 budget includes a variety of measures that should aid the economy in getting back on track. These include a much higher expenditure allocation to healthcare, up 137% compared with fiscal 2021, as well as productivity enhancing investments in transportation infrastructure, powering a 26% rise in capital expenditure, said S&P.

The budget’s emphasis on capital expenditure marks a noteworthy shift, and higher investment in India’s physical infrastructure should help raise investment potential and competitiveness in the economy over time.

S&P said India’s consistently strong real GDP growth is an important support to the sovereign ratings, and the government’s efforts to fortify growth prospects should help to maintain the economy’s healthy long-term prospects.

Should economic growth materially underperform, weaker financial savings generation in the economy could imperil the government’s ability to continue to finance itself at relatively affordable rates. Sustained high deficits could also distort capital allocation, pressuring private sector investment, it added.