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Market Commentary
India's public deficit is higher than its peers : DBS Research
Posted On : 2015-10-20 23:56:26( TIMEZONE : IST )
S&P's decision to affirm rather than raise India's sovereign ratings does not come as a surprise. There is a palpable improvement in the perception and conÂfidence towards the economy, with growth prospects also on the mend (see yesterday's Daily). However, while external imbalances get a hand from low commodity prices, fiscal deficits are still above regional peers, keeping governÂment borrowings high. Low GDP per capita was also raised as one of the key constraints on the rating, impeding long-term recovery.
India's public deficit is higher than its peers on the same rating rung, underpinÂning debt levels. Back in February, there was disappointment when a higher deficit target of 3.9% of GDP was set for the FY15/16 budget, but the roadmap validated the government's commitment to fiscal goals. However when deficits of state governments are included, the fiscal shortfall jumps to 6% of GDP. This compares unfavorably with the average deficit of -2.8% of GDP of the control group. Moreover, with revenue expenditure making up over three-fourths of overall spending, funds set aside for capital investments are insufficient.
Secondly, India's growth profile has improved considerably after the rebasÂing exercise earlier this year, but the size of the economy remains largely unÂchanged. This reiterates the need for pro-growth reforms to raise the economy's per-capita income. India's GDP per capita stood at ~USD 1700 last year, a fifth of China's and below Indonesia. In this regard, the government's push to raise the share of manufacturing sector as % of GDP is a positive step to improve job creation and raise income levels.
These improvements are likely to be a drawn-out affair. Overall, while the agenÂcies have put faith in the government's efforts, also helped by a credible inÂflation-fighting central bank, hurdles remain. These lower the scope of rating upgrades for now, but downgrade risks have certainly been put to rest.
