Moody's: India's fiscal position remains weak

The estimated budget deficit for the current fiscal year ending 31 March 2014 is 4.6% of GDP, modestly lower than the original 4.8% target.

February 18, 2014 8:42 IST | India Infoline News Service
Moody's Investors Service says that the Indian central government's interim FY2014/15 budget -- released on 17 February -- is consistent with the policy assumptions that underpin the government's Baa3 rating, which has a stable outlook.

The estimated budget deficit for the current fiscal year ending 31 March
2014 is 4.6% of GDP, modestly lower than the original 4.8% target.

As expected, the government met the target, despite lower-than-budgeted tax revenue growth, partly through non-tax revenues -- such as dividends from public-sector enterprises and fees from a telecom airwave auction -- and partly through a reduction in certain expenditures.

According to Moody's, while demonstrating a commitment to meeting its deficit targets, the Indian government's spending cuts are also likely to constrain GDP growth in the current year, as did similar expenditure reductions in FY2012/13.

Moody's also believes that the low tax revenues received in FY2013/14 underscore how sensitive government revenues are to GDP growth, which has fallen below initial budget forecasts. Meanwhile, the government's higher-than-budgeted subsidy bill reveals the fiscal position's exposure to commodity prices and exchange-rate fluctuations.

Thus, meeting the interim budget's proposed FY2014/15 deficit target of 4.1% of GDP depends on the pace of GDP growth, commodity prices, and currency trends over the next fiscal year.

Moreover, the budget to be announced by the new government that takes office after elections later this year -- and which are likely by May -- will determine FY2015 budget outcomes, as well as the longer-term fiscal trends that could affect the government's credit profile.

Moody's notes that India's fiscal deficit ratios have declined over the last two years, but its general (central and state) government fiscal deficits remain higher than those of similarly rated peers.

The effect of loose fiscal policy on the government's credit profile is offset to some extent by the government's access to domestic savings, which keep its borrowing costs low in real terms. Even so, the government's large debt burden requires that a significant portion of its
limited revenues is channeled towards interest payments. In addition, fiscal deficits have macro-economic costs, as evident in India's recurrent inflationary and balance of payments pressures.

Moody's stable outlook on India's Baa3 sovereign rating incorporates the macro-economic risks posed by the government's high deficit and debt ratios as well as its recent efforts to control the fiscal deficit through ad hoc measures.

The rating also incorporates the medium-term credit support provided by the government's favorable access to domestic savings for the purposes of financing its large borrowing requirements.

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