Two days earlier Chief Economic Advisor, K V Subramanium, said the GDP growth for the Indian economy to be at 1-2%. Today American rating agency, Moody, expected the Indian growth rate to be 0% for FY 21 and also said it is likely to bounce back to 6.6% in FY 22. The rating agency also said the fiscal deposit is expected to rise up to 5.5% for FY 21. The union budget estimated the fiscal deficit to be around 3.5% for the current financial year.
What does this mean to the Indian Economy
The Fiscal deficit is a metric used to describe the ability of the Government to fund its expenses. The Fiscal responsibility and Budget Management Act, 2003 mandates the government to keep the fiscal deficit under 3%. But this target has not been achieved by the Government of India. To fight the ongoing economic crisis a lot of stimulus is expected from the government. The union government has already announced a stimulus package up to 1.7 lakh crores rupees. The second set of economic package for reviving growth is expected at any time.
During such constraints, the fiscal deficit of the government will probably make the government to announce any significant economic package. The only source of funds for the government to spend and spur economic growth would be bonds. But due to the increasing fiscal deficit, the credit rating agency cut the outlook for India’s sovereign bond to its second-lowest investment grade ‘Baa2’. This doesn’t mean India would not be able to meet its obligations but makes the investor demand more return for investing in these bonds.
Then agency also noted the COVID-19 spread in the country has also significantly reduced the prospects of a durable fiscal consolidation. And it also said, “prolonged financial stress among rural households, weak job creation and, more recently, a credit crunch among non-bank financial institutions have increased the probability of a more entrenched weakening, we would be likely to change the rating outlook to stable if we saw a significant increase in the probability of fiscal metrics stabilizing and strengthening over time”.
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