Government may impose capping on corona spending to maintain credit rating, second relief package will not be heavy

The central government may impose capping on the relief package to be spent to deal with Corona. Two senior officials said that the government may stop the total stimulus package related to corona relief at Rs 4.5 lakh crore. The government may take such a step in anticipation of deterioration in sovereign ratings. Speaking to Inventiva, an official said that we are very cautious. The ratings of many countries have started to decline and the rating agencies are behaving differently with the developed and emerging countries. On Thursday, Fitch had warned that pressure on India’s sovereign rating could increase if the fiscal outlook weakens.

Second stimulus package could be 1.5 to 2 percent of GDP
“We have already announced an incentive package equal to 0.8 percent of GDP,” said the official, who is preparing for the stimulus package. Now we are left with an incentive package of 1.5% to 2% of GDP. The government announced an incentive package of Rs 1.7 lakh crore in March to deal with the economic impact of Corona. In this package, provision was made for cash transfer and distribution of food grains to the poor.

Second package outlines
The two officials said that the roadmap for the second stimulus package has been prepared. In this package, those who lose jobs and small and big companies can get relief. For companies, measures such as tax exemption can be announced. However, the finance ministry spokesperson did not comment on it.

Fitch and S&P rated India’s investment grade rating
Rating agency Fitch and Standard & Poor’s (S&P) have both pegged India’s investment grade rating recently, a notch above the junk rating. Moody’s Investors Service is the only rating agency that ranked its investment grade rating two places above the junk rating. The 40-day nationwide lockdown implemented to prevent the spread of corona infection has brought India’s economy to a standstill. Many experts have forecast the economy to shrink further this year.

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The situation of tax collection is much worse
Another official said that the state of government revenue is in a very difficult situation. Tax collection is quite bad. According to the official, the privatization program launched to raise Rs 2.1 lakh crore in the current financial year is not expected to begin at all. To curb the fiscal deficit, the government has cut the salary of all MPs, including the President, Prime Minister. Apart from this, the increase in allowances of government employees and pensioners has been stopped.

The target of fiscal deficit may fall behind
The central government has set a fiscal deficit target of 3.5 per cent of GDP in the current financial year. But it is difficult to achieve this target due to low revenue collection. The official said that due to the current state of the economy, declining revenue and government support to the economy, the fiscal deficit is expected to increase. Another official said that the government has limited options for spending in view of increasing fiscal deficit.

Extended lockdown until 17 May
The central government has extended the ongoing lockdown from May 3 to May 17. In this regard, the Ministry of Home Affairs has issued guidelines. However, lockdowns in the Green and Orange zones have some leeway. Economic activities can be started here at a limited level and keeping security in mind.

What is sovereign rating
International agencies set sovereign ratings based on the borrowing ability of governments of different countries. For this, it considers economy, market and political risk as the basis. The rating indicates whether a country will be able to repay its liabilities in the future? These ratings range from the top investment grade to the junk grade. Junk grades are considered to be in the default category.

Outlook revision determines the rating
Agencies are generally based on the rating revision of the countries’ rating. Outlook revision is negative, stable and positive. The country whose outlook is positive has a higher chance of upgrading its rating. However, the opposite may also be true. In general, ratings change due to economic growth, external causes and greater changes in the exchequer.

Sovereign rating has this effect
Many countries borrow from investors around the world to meet their needs. These investors look at the rating before lending. Agencies focus on timely principal and interest-bearing ability when deciding credit ratings. Higher ratings are considered less risky. This allows countries with higher ratings to get loans at lower interest rates.

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Importance of rating in India
In general, the Indian government does not take loans from foreign markets. Hence credit rating is not much importance. But it affects the sentiment. There is a possibility of foreign investors exiting the stock market due to low ratings. Apart from this, there is also the possibility of closure of new investment. In addition, the borrowing cost of financial institutions and companies raising funds through the ECB increases.

These agencies rate
Normally, Standard and Poor’s (S&P), Fitch and Moody’s Investors all set sovereign ratings. S&P and Fitch hold BBB + (BBB +) standard for ratings, while Moody’s standard Is Baa3. This is the highest rating that indicates investment grade.

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