The Indian government is likely to cap its overall spending on coronavirus-related relief at around Rs 4.5 lakh crore ($60 billion), due to concerns that excess spending could trigger a sovereign rating downgrade.
India will have to keep an eye on possible sovereign downgrades due to impact on the fiscal situation. Earlier, rating agency Fitch had warned India’s sovereign rating could come under pressure if its fiscal outlook deteriorates further as the government tries to steer the country through the coronavirus crisis.
Already a stimulus package of 1.7 trillion rupee which was 0.8 percent of GDP, was announced in March as soon as the pandemic began. As per officials, there might be some space for another 1.5 percent-2 percent GDP.
The yet to be announced stimulus plans are likely to be aimed at helping people who have lost their jobs, as well as both small and large companies, via tax holidays and other measures.
The ratings agencies, Fitch and Standard & Poor’s both have India pegged at an investment grade rating that is one notch above a junk rating, while Moody’s Investors Service is the only major rating agency that has India’s rating two notches above junk.
With an extended nationwide lockdown bringing the $2.9 trillion economy to virtual standstill. With the lockdown in many of India’s big cities extended by two more weeks, it is expected that economy is bound to stagnate, or definitely shrink this year, thus putting further pressure on government finances.
The government revenues are in a tight position given extremely weak tax collections, and also the fact that a Rs 2.1 lakh crore privatisation programme planned for this fiscal year, now looks like it will be a non-starter.
India has a fiscal deficit target of 3.5 percent of GDP for the current year that runs through March 2021, which it is most likely to miss due to weak revenue collections.