India sets ambitious fiscal deficit targets, but challenges remain: Moody's

The Indian government will face challenges in achieving its deficit target for the fiscal year ending March 2021 amid persistent structural and cyclical headwinds to growth, Moody's Investors Service said on Tuesday.

The Union Budget 2020-21 calls for a narrowing of the deficit to 3.5 per cent of gross domestic product (GDP) from 3.8 per cent in the current financial year. Any immediate strengthening in India's public finances is unlikely as pressures on growth persist, said Moody's.

"While the latest budget targets a narrower deficit, prolonged weakness in nominal GDP growth in India, combined with lower revenue collections, has dampened the outlook for fiscal consolidation, raising the risk that the debt burden may not stabilise," said Gene Fang, a Moody's Associate Managing Director.

"The debt burden is sensitive to nominal GDP growth, which we expect will remain lower on average than in the past. In light of India's weak fiscal health compared with its rating peers, any slippage in debt reduction will be credit negative," added Fang.

Meanwhile, the five-fold increase in deposit insurance to Rs five lakh per deposit holder is credit positive for banks as it will raise depositor confidence and bank funding, particularly across small and medium-sized private sector and cooperative banks.

The rise in public infrastructure spending and tax exemptions for sovereign wealth funds are also credit positive for infrastructure companies, as public capital outlays on highways and railways will increase modestly.

Additionally, the 100 per cent tax exemption on income and capital gains for infrastructure investment made by sovereign wealth funds will attract more long-term foreign capital.

In securitisation, quicker debt recovery and additional interest deduction on home loans are credit positive for Indian transactions. Reducing the loan size eligible for debt recovery will expedite the recovery of loans by non-bank financial institutions.

Additional interest deduction on affordable home loans will also raise borrower debt servicing ability and support residential mortgage-backed securities, said Moody's.

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