Budget 2018 strikes a balance between growth and fiscal prudence: Moody's

Says slippage in Budget deficit target not material; fiscal consolidation path moderately shallower

Global rating agency Moody’s on Monday said Budget 2018 had struck a balance between fiscal prudence and growth. A slight slippage in the Budget deficit targets was in line with expectations and would have no material impact on the country's overall fiscal strength, Moody's added.

In the Budget, the central government revised its 2018-19 projections for the fiscal deficit to 3.3 per cent of gross domestic product (GDP) from the original target of 3 per cent. It also revised its estimate for 2017-18 to 3.5 per cent of GDP, compared with the original target of 3.2 per cent.

"The revised fiscal consolidation path is modestly shallower than the previous road map, but it does not fundamentally alter India's overall fiscal strength," Moody's Vice President (Senior Credit Officer) William Foster said in a statement.

Besides, the medium-term target to reduce the central government’s debt-to-GDP ratio to 40 per cent was supportive of the sovereign credit profile, Foster added.

"The Budget, announced on February 1, benefits corporates, as well as the infrastructure and insurance sectors. The budgeted capital infusion for the public sector banks is in line with the recapitalisation road map detailed in October 2017," said Moody’s Vice President (Senior Analyst) Joy Rankothge.

The agency expects the government would 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. Some measures like the rule guiding an increase in the minimum support prices (MSP) and ambitious GST revenue targets could result in some further slippage, Foster said.

The formal adoption of key recommendations by the Fiscal Responsibility and Budget Management Committee (FRBM) is credit positive. These include the objective to bring down the central government debt-to-GDP ratio to 40 per cent (from about 50 per cent at present) and the use of the fiscal deficit target as the government's key operational parameter.

The Budget assumes 11.5 per cent nominal GDP growth for 2018-19, which is in line with the rating agency’s forecast. Sustained high nominal GDP growth would depend on the recovery of the private investment cycle, which will in turn be contingent on the successful implementation of current and future reforms.

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

The measures of higher rural spending, lower corporation taxes, and relaxing restrictions on the ability of financial intermediaries to invest in lower-rated corporate bonds are credit positive to Indian corporate entities.

The infrastructure sector would benefit from a boost in spending and the government's continued focus on public investment would also help galvanise India's upturn in capital spending, it added.