Moody’s expects India’s fiscal position to remain weak

Moody’s indicated on Thursday that India’s fiscal consolidation remains weak, given large debt burden and low medium-term GDP growth.

While Moody’s Investors Service says India’s (Baa3 negative) weak fiscal position will remain a key credit challenge in 2021, its Indian affiliate, ICRA, says it expects a considerable rebound in India’s economic growth in the fiscal year ending March 31, 2022 (fiscal 2022), on the back of higher Central government spending and a pick-up, albeit uneven, in consumption.

ICRA projects that real and nominal GDP will rise 10.5 per cent and 14.5 per cent, respectively, for fiscal 2022 as the pandemic recedes. According to Moody’s, the Central government’s fiscal deficit for fiscal 2021 and fiscal 2022 should be lower than projected, supported by stronger revenue generation in the fourth quarter of fiscal 2021 and higher nominal GDP growth in fiscal 2022.

Stable outlook for Indian corporates: Moody’s and ICRA

“Still, wide fiscal deficits combined with lower real and nominal GDP growth over the medium term will constrain the government’s ability to reduce its debt burden,” Gene Fang, a Moody’s Associate Managing Director, said in a statement.

According to Moody’s, the prospects for fiscal consolidation remain weak given the government’s mixed track record of implementing revenue-raising measures. Although the government has not provided an explicit medium-term fiscal consolidation road map, according to the Budget speech it targets a fiscal deficit of 4.5 per cent of GDP by fiscal 2026, which amounts to an average annual deficit reduction of about 0.5 per cent of GDP over four years.

Given India’s very high debt burden, this gradual pace of consolidation will prevent any material strengthening in the government’s fiscal position over the medium term, unless nominal GDP growth picks up sustainably to reach much higher rates than historically recorded.

Pace of underlying growth in Indian economy remains subdued: ICRA

Broadening rebound

According to ICRA, recent economic data signal a broadening of the economic rebound in the third quarter of fiscal 2021, with most tracked indicators recording improvements from the year-ago period. Data for the current quarter also suggest a stable economic momentum.

“A swift utilisation of the higher allocation made by the Government of India towards capital spending for fiscal 2022 will cement the growth revival. Moreover, the timely implementation of the Union Budget’s proposals for enhancing infrastructure financing will likely boost growth over the medium term,” says Aditi Nayar, ICRA’s Principal Economist.

In terms of the State governments, the Fifteenth Finance Commission has recommended a higher net market borrowing limit of 4 per cent of gross state domestic product (GSDP) for fiscal 2022, up from 3 per cent of GSDP before fiscal 2021. However, the extent to which the enhanced borrowing limit will be channelled toward growth boosting capital spending in fiscal 2022 remains uncertain, according to ICRA.

Finally, private-sector capacity expansion in the near term is expected to be restricted to those sectors that undergo a faster rebound to relatively healthier capacity utilisation levels.

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