Fiscal metrics remain weak: Moody's

Cyclical and unanticipated developments would heighten India’s fiscal pressures.

Published - February 23, 2016 11:33 pm IST

India's economic growth at more than 7 per cent may be faster than that of its peers, but subdued rural demand and weak corporate profitability will contribute to hampering fiscal consolidation in the upcoming Budget, Moody's Investors Service said.

The credit rating agency said that even if the February 29 budget shows deficit targets are being met or surpassed, fiscal metrics in India will remain on a weaker footing than other countries with similar sovereign credit ratings.

“Even if budgetary consolidation continues, India’s fiscal metrics will remain weaker than rating peers in the near term, because of the relatively high level of India’s state and central government deficits and debt. The fiscal weakness is partly due to structural factors,” according to a statement issued by Moody’s on Tuesday.

Low per-capita incomes limit the tax base and raise pressure for subsidies and development spending, while high debt levels (63.8 per cent of GDP in 2015-16) restrict fiscal flexibility.

India's credit rating will not just depend on the forecasts for fiscal management but the specific measures the Budget takes to expand the revenue base, at a time when tax collections are tapering off, and insulate government expenditure from economic shocks.

Separately, cyclical and unanticipated developments would heighten fiscal pressures and any improvements in the fiscal deficit are ‘likely to be limited in the near-term,” the agency stressed, referring to a rise in food subsidy costs owing to a drought, revision of civil servant salaries next year and the need to recapitalise public sector banks.

Economic Affairs Secretary Shaktikanta Das acknowledged these fiscal constraints on Monday and indicated that the government would neither go overboard with public spending to jumpstart the economy as some people have suggested, nor stick ‘tightly’ to the fiscal deficit goalposts. “The reality is somewhere in the middle,” he said. India’s fiscal deficit stood at 4.1 per cent of GDP in 2014-15 and the government has committed to a target of 3.9 per cent for this fiscal and 3.5 per cent for 2016-17, deviating from an original target to bring the deficit down to three per cent of GDP by then.

“…Whether the central government deficit meets, modestly outperforms or slightly underperforms current targets, India’s fiscal position will remain weaker in the near term than its peers,” Moody’s said. The shift in the roadmap made last year underscores the agency’s expectation that even with very modest deficit reduction goals, fiscal consolidation will be ‘difficult to achieve’ though the government is committed to it over the medium term.

“While it may or may not be a part of the Budget speech, clarity on the Goods and Services Tax regime would provide insight into how revenues could evolve over the longer term. On the expenditure side, the Budget will reveal how the government allocates current and capital spending in the context of the recommendations of the Seventh Pay Commission and , the still sluggish outlook for capital investment and efforts to strengthen state-owned banks’ balance sheets,” according to Moody’s statement.

The rating agency did highlight one silver lining for India compared to its peers – lower reliance on foreign currency debt, even though its public debt to GDP ratio is higher than similarly rated countries like Indonesia, Philippines, Romania and Turkey.

“This insulates government finances from gyrations in the exchange rate, which have been particularly severe in the last few years, and will continue to be so. Emerging markets with a higher reliance on foreign currency financing have witnessed sovereign borrowing costs rise as global risk appetite diminishes,” said the Moody’s note put together by a team of four analysts led by associate managing director Atsi Sheth.

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