From a sovereign credit perspective, a key aspect of Thursday's Budget announcement was the finance minister Arun Jaitley's intention to reduce the central government's Budget deficit to three per cent of the gross domestic product (GDP) by March 2017 from a forecast 4.1 per cent of GDP in March 2015. India's Baa3 sovereign rating 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 Baa3 sovereign rating 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 budget was in keeping with this expectation. The writer is Moody's investors service vice-president for sovereign risk group