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Budget's sovereign credit impact will be modest

The lack of details on expenditure reduction & revenue expansion reveals how difficult it is to implement policy shifts in India's complex political economy

Atsi Sheth 

From a sovereign credit perspective, a key aspect of Thursday's announcement was the finance minister Arun Jaitley's intention to reduce the central government's deficit to three per cent of the gross domestic product (GDP) by March 2017 from a forecast 4.1 per cent of in March 2015.

India's is constrained by weak government finances - which have fueled inflation, raised domestic interest rates and heightened macroeconomic imbalances. Therefore, fiscal consolidation efforts would be credit positive. However, until the government clarifies the revenue and expenditure measures that it will implement to lower the deficit, it is difficult to assess the likelihood, sustainability and quality of fiscal consolidation.


The lack of details on expenditure reduction and revenue expansion reveals how difficult it is to implement policy shifts in India's complex political economy - even when there is a consensus around the need for economic change and the government enjoys a strong electoral mandate.

Therefore, while market sentiment may have been buoyed by expectations of quick and significant policy change, Moody's stable outlook on India's is informed by our expectation that a reversal of current weak fiscal and economic trends will be slow and calibrated, rather than immediate and rapid. As a preliminary indication of policy and economic change, India's 2015 was in keeping with this expectation.

The writer is Moody's investors service vice-president for sovereign risk group

First Published: Sat, July 12 2014. 21:13 IST
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