Finance minister Nirmala Sitharaman said on Wednesday that she does not foresee any possibility of a sovereign rating downgrade for India in spite of the widening fiscal deficit as experts around the world have been advocating greater spending to support economic recovery.
Sitharaman said in her reply to the Rajya Sabha debate on Finance Bill, 2021 that the consensus among many global experts was for giving fiscal stimulus, which India too adopted. Rajya Sabha passed the Bill by a voice vote.
“India enjoys an investment grade rating and we are not foreseeing any change or any chance of any downgrade due to us incurring higher deficits-- I have announced quite a big borrowing and spending," the minister said. She added that rating agency Fitch has recently upgraded India’s growth projection.
“Many of the economists and rating agencies across the world are of the opinion that governments need to spend to put the economies back (on track). Globally that is the advice that everybody is receiving and we are also following it. It should not hurt our rating," the minister said.
Fitch in its latest Global Economic Outlook has revised India's gross domestic product (GDP) growth estimate to 12.8% for FY22 from the previous 11% on the back of a stronger carryover effect, a looser fiscal stance and better virus containment.
Fitch Ratings last month hinted that the counter-cyclical policy of fiscal support to nascent economic recovery in FY22 Budget may lead to rise in public debt which may be viewed negatively from sovereign rating perspective. All the three major rating agencies—Standard & Poor’s, Fitch Ratings and Moody’s Investors Service have assigned lowest investment grade to India, a notch above the junk status.
Sovereign rating is crucial for a country because when a credit rating agency downgrades a country’s sovereign debt, all debt instruments in that country may have to be downgraded accordingly because of the sovereign ceiling doctrine. Commercial banks downgraded to sub-investment grade will find it costly to issue internationally recognized letters of credit for domestic exporters and importers, isolating the country from international capital markets. Downgrading corporate debt to sub-investment grade means that firms will face difficulties issuing debt on international capital markets.
The latest Economic Survey said India’s current sovereign rating does not reflect its fundamentals because India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history.
The minister defended the budget saying that the government chose to step up capital spending as it has an immediate multiplier effect in job creation and income generation to workers. Spending towards building social and physical infrastructure was raised from ₹4.12 trillion in the year ending 31 March (budget estimate, which has been revised to ₹4.39 trillion in revised estimates), to ₹5.54 trillion in FY22. “This will have a bearing on demand," the minister said.
The minister also explained to the members of the House that lowering the corporate tax rate does not necessitate lowering the rate for partnership firms too as both are in different tax regimes. “When income of a company is distributed to shareholders the shareholders have to pay the tax arising from dividend income in addition to the tax the company paid on its own income. However, when the partner in a partnership firm receives his money, particularly from his capital account in the partnership, it is not taxable. Hence two rates cannot be compared at all," the minister said.
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