Moody's: India's budget prioritizes growth over fiscal consolidation

Moody's Investors Service says that India's budget, which prioritizes growth over deficit reduction, is unlikely to materially change India's sovereign credit profile, which is supported by the economy's robust growth, but constrained by the government's weak fiscal metrics.

Moody's sovereign rating for India is Baa3, with a stable outlook.

India's Finance Minister Arun Jaitley announced on 28 February that the central government budget deficit would fall to 3.9% of GDP in the fiscal year ending 31 March 2016, from 4.1% this fiscal year, and would decline to 3% of GDP by March 2018.

This new forecast pushes back the targets announced in the July 2014 fiscal roadmap, which had envisaged a deficit of 3.6% of GDP in fiscal 2016, falling to 3% by March 2017.

Moody's points out that the dilution of an already modest deficit reduction plan underscores its view that India's structural constraints, such as a low tax revenue base and rigidity in expenditures, make fiscal consolidation difficult, despite accelerating economic growth, lower commodity prices, and the government's command of a substantial majority in the lower house of parliament.

As a result, India's fiscal profile will remain weaker than that of similarly rated sovereigns over the next several years.

Moody's notes that if the central government deficit fell to 3% of GDP, India's general (i.e. state + central) government deficit would likely fall somewhere between 5% and 6% of GDP.

While such a development would mark a reduction from the 7.7% average of the last five fiscal years, it would still be higher than the median for most sovereigns in Moody's rating universe, and higher than the median for sovereigns that share India's Baa3 rating.

On the other hand, recent policy announcements, including the budget, support Moody's expectation that India's growth will remain stronger than the global average, and more robust than the median for similarly rated sovereigns.

According to Moody's, the new budget contains several measures that, if effectively implemented, will accelerate India's GDP growth. These include greater public spending allocations to infrastructure, as well as incentives for private sector investment in the sector.

Furthermore, the implementation of the Goods and Services Tax in April 2016 will lead to scale and productivity gains, and direct cash transfers for subsidy delivery could increase the efficiency of the social welfare system, although they will not reduce subsidy spending.

The introduction of measures to monetize gold assets will facilitate a rise in financial savings and the planned simplification of the corporate tax regime could increase investment.

Moody's view is that the credit impact of the budget will depend on whether its implementation facilitates growth that is primarily driven by government expenditure or growth that sets the stage for higher savings, investment, productivity and profitability.

The latter type of growth, if achieved, would be credit positive because it would more likely be sustainable without creating inflationary and current account pressures, and would also reduce the fiscal deficit in later years through revenue buoyancy.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.