Modi govt may cut capex to stick to 3.3% fiscal deficit, says Moody's

Moody's Investors Service today said it expects India to stick to the estimated fiscal deficit of 3.3 per cent of GDP and even cut capital expenditure to offset any slippage from the budgeted target.

It however said any reduction in the excise duty on petroleum and diesel products in view of high crude oil prices, would exert negative pressure on India's sovereign credit profile.

Moody's had last year upped India's sovereign rating for the first time in over 13 years to 'Baa2' with a stable outlook, saying that growth prospects have improved with continued economic and institutional reforms.

Moody's expects the government to meet its fiscal deficit target of 3.3 per cent for 2018-19, based on its commitment to gradual fiscal consolidation and budget assumptions which appear achievable, it said in a statement.

"Although Moody's sees some downside risk to budgeted revenue and expenditure targets, it expects that the government would cut back on planned capital expenditure, as has occurred in past years, if it is needed to offset any slippage from its fiscal targets," Moody's VP and Senior Credit Officer William Foster said.

On the revenue side, Moody's sees some downside risk to the government's assumptions on the collections from the Goods and Services Tax (GST) and petroleum products excise duty, Foster said.

The ongoing uncertainty around GST implementation and compliance, including the timely provision of input tax credit refunds and iterative changes to tax rates, could result in some potential revenue losses.

However, the initial setbacks on implementation appear to be fading and, over the medium term, Moody's expects GST compliance to stabilise and revenues to become more predictable as the economy becomes more formalised, it added.

"If global oil prices remain high, Moody's says the government could intervene by reducing the excise duty on petroleum and diesel products, which would exert negative pressure on India's sovereign credit profile,"it said.

Excise duties make up over 20 per cent of retail selling prices and were started in 2016 when oil prices fell.

According to Moody's Indian affiliate, Icra Ltd, the high crude oil price is likely to widen India's current account deficit (CAD) and points at slowing foreign portfolio investments as an area of concern.

"If global oil prices remain at current levels, Icra expects India's CAD to widen to 2.4 per cent of GDP in 2018-19 from 0.7 per cent in 2016-17," Icra Principal Economist Aditi Nayar said.

However, higher crude oil prices and a weaker Rupee would improve remittances and the services trade surplus in 2018-19, offsetting some of the adverse effects of rising commodity prices, Nayar said.

The price of Indian basket of crude surged from USD 66 a barrel in April to USD 74.

The substantial rise in India's foreign exchange reserves has been accompanied by an increase in the merchandise import bill.

The current level of reserves is equivalent to around 10 months of 2017-18 imports, which is significantly healthier than the around seven months available amid the taper tantrum in 2013, ICRA said.

"Nevertheless, an expected slowdown in foreign institutional investment has emerged as a concern, even though foreign direct investment (FDI), external commercial borrowings, and deposit inflows from non-resident Indians (NRIs) are likely to be healthy in 2018-19," it added.

It further said the PSU bank recapitalisation plan will broadly resolve the regulatory capital needs of the country's 21 public sector banks and help augment the banks' loan-loss buffers, but will be insufficient to support credit growth.

"The PSBs' capital shortfalls are larger than the scale that the government had expected when it announced the recapitalisation plan in October 2017, mainly because they have failed to raise additional capital from the market," Moody's VP and Senior Credit Officer Alka Anbarasu said.

While unveiling its capital support plan in October 2017, the government had anticipated that the banks would raise about Rs 580 billion from the equity market. However, they have so far raised only about Rs 100 billion.

"Moody's believes it may be difficult for them to raise significantly more, after consideration of the substantial decline in their share prices since the beginning of 2018, which indicates weak investor demand for Indian bank equities.

"The share prices of PSBs has declined by 19 per cent since beginning of the year, compared to a 3 per cent increase in the Bombay stock market index," Moody's said.

Icra said with the likely resolution of large stressed borrowers under the insolvency and bankruptcy code (IBC), there could be a decline in the gross NPAs and net NPAs to below 9 per cent and 5 per cent, respectively by March 2019.