Budget 2017

RBI Chief Urjit Patel Warns On Government Debt Ahead Of Budget

The government has been pushing hard to get India's credit rating upgraded. But due to high debt to GDP ratio of the country, international ratings agencies like Moody's and S&P have so far refused upgrade India's rankings.
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Dr Patel said that higher government debt was taking a toll on India's sovereign credit rating
Dr Patel said that higher government debt was taking a toll on India's sovereign credit rating

Highlights

  1. Government has been pushing hard to get India's credit rating upgrade
  2. Moody's rates India at "Baa3", which is the lowest grade
  3. S&P rates India at "BBB-minus" with a "stable" outlook
Reserve Bank of India governor Urjit Patel on Wednesday urged the government to cut borrowing, just weeks before Finance Minister Arun Jaitley is due to unveil the Budget. The finance minister will outline the government's fiscal deficit target for next fiscal year (2017-18) in the Budget.

The RBI chief's comments come at a time when many economists expect the government to relax the fiscal deficit target for 2017-18 to support economic growth in the wake of demonetisation.  The World Bank today cut India's growth estimate for 2016-17 to 7 per cent, as compared to the earlier forecast of 7.6 per cent.  For 2016-17, the government had targeted fiscal deficit of 3.5 per cent of the GDP.

Dr Patel said that higher government debt was taking a toll on India's sovereign credit rating.

"Our general government deficit (that is borrowing by the center and states combined) is, according to IMF data, amongst the highest in the group of G-20 countries. In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade," said Mr Patel at the Vibrant Gujarat Summit in Gandhinagar.

The government has been pushing hard to get India's credit rating upgraded. But due to high debt to GDP ratio of the country, international ratings agencies like Moody's and S&P have so far refused upgrade India's rankings despite improvement in overall macro-economic numbers.
While Moody's Investors Service rates India at "Baa3", the lowest investment-grade rating, but with a "positive" outlook, the S&P rates India at "BBB-minus" with a "stable" outlook.

Dr Patel said "borrowing even more and pre-empting resources from future generations by governments cannot be a short cut to long-lasting higher growth."

"Instead, structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the Indian growth front," he added.

India's former chief statistician Pronab Sen says the finance minister could settle for a fiscal deficit target of 3.5 per cent for 2017-18. "Demonetisation will impact India's growth negatively and the government would want to be seen doing something to deal with it. The ratings by foreign agencies can be looked at next year," Mr Sen said.

Bank of America Merrill Lynch economists too expect the government to relax fiscal deficit target. "We expect Finance Minister Arun Jaitley to target a fiscal deficit of 3.5 per cent of GDP  - same as 2016-17 - in 2017-18 in his February 1 Budget, easing the 3 per cent target," BofA-ML said in a recent research report.

 

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