Food Security Bill: Impact on States' finances may be neutral: Fitch

| | Updated on: Dec 22, 2011

Rating agency Fitch has estimated that the impact of Food Subsidy Bill on States' finance is likely to be neutral. However, it will be a credit positive for States with existing universal public distribution systems.

However, in a special report on States' finances, the agency has remarked that the States' aggregate fiscal deficit could go beyond the Government estimates in the current fiscal. This slippage will compound the stress on States' credit quality. Highly leveraged States with low economic growth are more susceptible to problems arising from the present challenging environment.

Mr Devendra Kumar Pant, Director in Fitch's International Public Finance team, said, “States are likely to have a slippage from their aggregate budgeted fiscal deficit of 2.2 per cent of GDP in FY12 due to a larger-than-expected growth slowdown.” However, the reform-oriented economic growth in fiscal year ending March 2013 (FY 13) will help the States achieve faster fiscal consolidation.

Meanwhile, the agency expects ratings for States to be ‘stable' in FY 13. “Despite an expected slowdown in economic growth in 2011-12 to 7 per cent from 8.5 per cent in 2010-11, the Indian economy is expected to perform better than the developed economies. Fitch believes that Indian growth will rebound to 7.5 per cent in FY 13, which will provide adequate support for the sub-nationals (read States).”

Although election-bound States in particular are likely to increase allocation for food and power, this trend is likely to be seen in all the States. A few States may restore fiscal discipline after the election, but the impact of such measures will depend on how lax fiscal policy was previously.

On the Food Security Bill, it said that since the expenditure will be on the Central Government's budget, the net impact on States will vary depending on the scale of the increase in population coverage. States with universal public distribution will benefit, but the aggregate impact on the State's credit quality will be neutral.

Meanwhile, the agency has cautioned that a slowdown in growth as a result of the difficulties in Eurozone and the US, combined with failure to reform the structural inefficiencies of the Indian economy could lead to the deterioration in the States' fiscal performance. This could lead to a revision of outlooks, the agency said.


Published on March 12, 2018

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