Cutting deficit: Moody’s flags lack of details in Budget

BL 11 July 14

But the target addresses a key constraint on rating and may strengthen govt finances

 Moody’s Investors Services has said that the BJP Government’s maiden Budget lacks details on how fiscal consolidation will be achieved in the coming years.

But the deficit targets reflected in the latest Budget document are likely to stem a further weakening of government finances and address a key constraint on India’s Baa3 sovereign rating, Moody’s said in a note published in New York on Friday.

Calibrated correction

As a preliminary indicator of policy intent, the Budget supported the rating agency’s baseline assumption that a reversal of weak fiscal and economic trends is likely in India.

But it will be slow and calibrated, rather than immediate and rapid.

This assumption underpins the stable outlook on India’s Baa3 sovereign rating, Moody’s added. From a forecast of 4.1 per cent of GDP for end March 2015, the Centre’s fiscal deficit is projected to come down to a level of 3 per cent of GDP by March 2017, the latest Budget announcement showed.

On Thursday, Finance Minister Arun Jaitley presented the Union Budget for 2014-15— the first major fiscal and economic policy statement of the Modi Government.

While the projected fiscal deficit numbers will provide some comfort to international rating agencies, the main issue raised by several economy-watchers is the reliability of these numbers.

Moody’s said that the Budget document lacked details on revenue and expenditure measures to lower the deficit.

This makes it difficult to assess the likelihood that future deficit targets will be met.

It was also pointed out that the Government’s avowed intention to reduce subsidy expenditure was not accompanied by proposed changes to the current subsidy regime. Similarly, the commitment to implementing the long-planned Goods and Services Tax was reiterated but, again, without guidance on its details.

Inflation concerns

Unless GDP growth revives from current levels, tax revenues could be lower than forecast, jeopardising the deficit target, Moody’s has said. On the growth-promoting measures announced in the Budget — increase in FDI limits in the insurance and Defence sectors; higher government spending on irrigation, road building and other infrastructure development — Moody’s said these measures could contribute to growth.

However, they are unlikely to lead to significant acceleration from current levels unless accompanied by a decline in inflation and interest rates, besides fewer regulatory constraints on investment, Moody’s said.

(This article was published on July 11, 2014)