India’s fiscal metrics to remain weaker than peers in near term: Moody’s

Days ahead of the Union Budget, Moody’s Investors Service today said that India’s fiscal metrics will remain weaker than its peers in the near term even if Finance Minister Arun Jaitley was to stick to fiscal consolidation roadmap.

Jaitley in his Budget for 2016-17 will on Monday reveal if the credit-positive five-year trend of narrowing budget deficits — from 6.5 per cent of GDP in fiscal 2010 to 4.1 per cent in 2014-15 — will continue.

He will also say if the government was on track to reduce the deficits to 3.9 per cent and 3.5 per cent of GDP this fiscal year and the next, respectively.

Fiscal consolidation plans

Moody’s said the importance of the upcoming Budget lies in its message on the government’s fiscal consolidation plans.

The government’s fiscal deficits have reduced over the last five years, and this has supported the stabilisation of government debt ratios.

“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,” Moody’s said.

Based on the trends in revenues and expenditures over the last five years, Moody’s said the fiscal consolidation process remains vulnerable to economic shocks, such as fall in corporate profits or consumption growth, or an increase in subsidy costs.

Although fuel subsidy reform has partially addressed this vulnerability, food subsidies still pose risks.

Structural factors

The fiscal weakness, it said, was partly due to structural factors. Low per capita income of around $1,700 limits the government’s tax base and raise pressure for subsidies and development spending.

“Moreover, interest payments absorb almost a fifth of Indian government revenues — a consequence of high debt, which we estimate at 63.8 per cent of GDP in fiscal 2016, down from 83.1 per cent in fiscal 2005. This restricts the government’s fiscal flexibility,” it said.

In addition, certain cyclical factors and unanticipated developments augment fiscal pressures.

“For instance, despite a robust GDP growth above 7 per cent in 2015, rural demand and corporate profitability remained subdued, weighing on tax revenues,” it said adding that drought has added to food subsidy costs.

Stating that the current growth environment complicates fiscal consolidation, Moody’s said the 7 per cent-plus growth rate that outperformed similarly rated sovereigns, was accompanied in 2015 by subdued rural demand due to poor monsoons and weak corporate profitability as pricing power remained low.

Consequently, government tax revenue growth has cooled. At the same time, 2016 expenses could rise due to civil servant pay revisions and bank recapitalisation costs. In addition, sluggish private investment has led some policy analysts to suggest government spending to kick-start the process.

Moody’s said next year, pay revision for government employees and bank recapitalisation costs are likely to push up the government’s expenses, while the revenue outlook will depend on whether rural demand and corporate profitability recover.

“Therefore, fiscal improvements are likely to be limited in the near term. Whether they occur over the medium term will depend on the successful implementation of policy measures that expand the revenue base and/or curtail expenditure commitments,” Moody’s said.

However, some of the credit risks posed by continued fiscal weakness are offset to a certain extent by the government’s access to long-term, rupee-denominated domestic financing, it added

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