India's fiscal situation unlikely to improve much in next 2-3 years: S&P

S&P Global currently has a BBB- rating on India with a stable outlook.

India's public finances are unlikely to improve "materially" in the next two or three years compared to where they stood before the coronavirus outbreak, analysts at S&P Global have said.

"In the next 2-3 years, we don't expect things to be materially better compared to the pre-COVID situation. In fact, we are likely to see (general government) deficits ranging between 7-8 percent," Kim Eng Tan, S&P Global's Senior Director for APAC sovereign rating, said on October 26.

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General government deficit and debt refers to the combined position of the central and state governments.

According to Tan, India's fiscal metrics are "probably the weakest part" of its credit profile, with total debt at "pretty high" levels.

"At the same time, the government adds to it by running large deficits year on year," Tan added.

S&P has a BBB- rating on India with a stable outlook.

The central government is looking to lower its fiscal deficit, which had surged to 9.2 percent of GDP in the pandemic-hit 2020-21 – to 5.9 percent this year, with an eye on bringing it below 4.5 percent by 2025-26. Similarly, the combined fiscal deficit of state governments has also declined from 4.1 percent of GDP in 2020-21 to a budget estimate of 3.1 percent in 2023-24.

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As per professional forecasters surveyed by the Reserve Bank of India (RBI), the combined fiscal deficit of the Centre and states is seen at 8.7 percent of GDP this year and 8.3 percent in 2024-25.

In terms of the debt level, the International Monetary Fund's latest projections say that India's general government debt will increase from 81.0 percent of GDP in 2022 to 81.9 percent in 2023 and 82.3 percent in 2024 before declining gradually to 80.5 percent in 2028. According to the recommendations of the FRBM Review Committee, the combined government debt should be reduced to 60 percent of GDP – 40 percent for the Centre and 20 percent for states. In 2022-23, states' debt stood at 29.5 percent of GDP according to their budget estimates.

India's public finances have taken centerstage because of the upcoming state and national elections, with political parties' efforts to woo voters expected to lead to some additional spending.

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"No Indian government would run a very tight fiscal policy in an election year," Kim Eng Tan said, although he noted that there was little the Centre could do to control states' actions.

A second reason cited by Tan as to why the fiscal deficit is unlikely to reduce materially is the need to spend on infrastructure, which remains "relatively weak" compared to India's peers. While Tan said India was attracting "quite a lot of positive attention from international investors", the need to keep attracting foreign investment meant the Indian government will continue to keep investing in infrastructure.

"And for that reason, we also do not believe that the government will cut spending enough or in sufficient amount to cause deficits to come down materially," he said.

The Centre has set itself a record capex target of Rs 10 lakh crore for 2023-24.