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Fiscal deficit in FY23 may be lower than target, says ING

The lowering of the debt-to-GDP ratio should be sufficient for Fitch to leave its India credit rating at BBB- and potentially even lift the negative watch in due course, ING has said

July 05, 2022 / 03:46 PM IST
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Representative image

India’s fiscal deficit for the financial year 2022-23 may be lower than the budget target of 6.4 percent of the gross domestic product as the nominal GDP is likely to be higher than assumed, ING Bank said in a note on July 5.

“If our projections for GDP, inflation, rates and bond yields pan out, and revenues and expenditures evolve accordingly, then we may even see the deficit coming in lower than 6.3 percent,” Robert Carnell, Regional Head of Research, Asia-Pacific at ING said.

“With the simplified debt dynamic arithmetic of R, India looks on course to see the debt to GDP ratio come down from 86.9 percent GDP in 2022 to 82.1 percent in 2023.”

The note comes a few days after data released by the government showed that the fiscal deficit at the end of May stood at 12.3 percent of the annual budget target for 2022-23, mainly due to higher expenditure.

The lowering of the debt-to-GDP ratio should be sufficient for Fitch to leave its India credit rating at BBB- and potentially even lift the negative watch in due course, ING said.

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Also read: Record trade deficit to stay, rupee to fall to 82 in Q3 2022: Nomura

“With India still considered a likely candidate for inclusion in global bond incises in the future, it is important that it keeps its investment-grade rating,” it added.

The COVID-19 battered economy is on the mend but monetary tightening by central banks, the Russia-Ukraine war, supply concerns and the threat of a slowdown have raised questions over the recovery.

The government, which slashed local taxes on fuel to curb soaring inflation, recently imposed a windfall tax on fuel companies and exports as it seeks to balance the budget. A top finance ministry official has said that the budget deficit target will be met.

Also read: Businesses' inflation expectations dropped below 6% in May, IIM survey shows

The fiscal deficit widened sharply in the wake of the pandemic but the government seeks to lower it gradually.

ING expects Indian nominal GDP to be higher than the 2022-23 estimate of Rs 2,58,00,000 crore and expects the Reserve Bank of India to continue tightening policy rates over the rest of the year.

Nominal GDP is the gross domestic product at current market prices, whereas the so-called real GDP is the gross domestic product adjusted for inflation. It is the nominal GDP that is used to calculate the fiscal deficit as a percentage of GDP.

The house forecasts bond yields to decline slowly over the second half of this year, as global recession fears mount.

While inflation, which has remained above the RBI’s target range for several months, is unlikely to see much of a decline until 2023, in the short term, India may see a few months of surprisingly low food prices, which will help to reduce price pressures elsewhere, ING added.
first published: Jul 5, 2022 03:46 pm
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