Moody's: India's FY2019 budget balances growth and fiscal consolidation; benefits for corporates and insurance

Moody's Investors Service believes that India's budget for the fiscal year ending March 2019 (fiscal 2019) strikes a balance between fiscal prudence and growth. Slight slippage in the budget deficit targets has no material impact on the country's overall fiscal strength and is in line with Moody's expectations.

In the budget, India's (Baa2 stable) government revised its fiscal 2019 projections for the central government deficit to 3.3% of GDP and it fiscal 2018 estimate to 3.5% of GDP, compared with original targets of 3.0% and 3.2%, respectively.

"The revised fiscal consolidation path is modestly shallower than the previous roadmap, but does not fundamentally alter India's overall fiscal strength," says William Foster, a Moody's Vice President -- Senior Credit Officer. "Furthermore, the medium-term target to reduce the central government debt-to-GDP ratio to 40% is supportive of the sovereign credit profile," adds Foster.

"Moreover, the budget, announced on 1 February, benefits corporates, as well as the infrastructure and insurance sectors, while the budgeted capital infusion for the public sector banks is in line with the recapitalization roadmap detailed in October 2017," says Joy Rankothge, Vice President -- Senior Analyst.

Moody's expects that the government will meet next year's deficit target, based on achievable budget assumptions and demonstrated commitment to fiscal prudence. However, some ambitious revenue assumptions and uncertainty about some spending items could result in a shortfall to overall fiscal consolidation.

"The projected expenditure restraint and strong revenue growth are likely to be broadly achieved, although some measures such as the rule guiding increases in Minimum Support Prices (MSPs) and ambitious GST revenue targets could result in some further slippage," remarks Foster.

Moody's further considers the formal adoption -- as stated by Finance Minister Jaitley when he announced the budget -- of key recommendations by the Fiscal Responsibility and Budget Management Committee (FRBM) as credit positive.

These include the objective to bring down the central government debt-to-GDP ratio to 40% (from about 50% today) and use of the fiscal deficit target as the government's key operational parameter.

The budget assumes 11.5% nominal GDP growth for fiscal 2019, which is in line with Moody's forecast. Sustained high nominal GDP growth will depend on the recovery of the private investment cycle, which will in turn be contingent upon the successful implementation of current and future reforms.

Recent government efforts to address balance sheet issues in public sector banks, through recapitalization and resolution of problem loans should contribute to stronger investment.

For most of India's corporates, the budget's measures of higher rural spending, lower corporate taxes, and relaxing restrictions on the ability of financial intermediaries to invest in lower rated corporate bonds are credit positive.

The infrastructure sector will benefit from a boost in spending and the government's continued focus on public investment will also help galvanize India's upturn in capital spending.

Finally, the insurance market will benefit from the launch of a national health scheme and the merger, as well as listing, of three state-owned insurers. The insurance, and in particular non-life market, is set to benefit from the growth prospects provided by the widening of universal health insurance cover.

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