Moody's flags govt's dilemma on fiscal front

Despite fiscal consolidation, deficits and debt to be higher than comparable economies, it says

Moody’s Investors Service said on Tuesday India’s fiscal position would remain weaker than its peers in the near term even if Finance Minister Arun Jaitley was to stick to the government’s fiscal consolidation road map.

The comments, coming a few days ahead of the Budget, suggested a dilemma the government faced in sticking to its fiscal consolidation plans and boosting economic growth. The report emphasised the need for fiscal consolidation.

“Even if budgetary consolidation continues, India’s fiscal metrics will remain weaker than rating peers in the near term, because of the relatively high level of India’s state and central government deficits and debt,” Moody’s said.

At around 63.8 per cent of gross domestic product (GDP), the government’s debt ratio was higher than the median of 49.5 per cent for similarly rated peers.  “Without continued fiscal consolidation, India’s government finances will continue to compare poorly to peers,” Moody’s said.

The current growth environment complicated fiscal consolidation, the rating agency said. India’s GDP growth rate of more than seven per cent outperformed those of sovereigns with similar ratings. In 2015, this expansion was accompanied by subdued rural demand, due to poor monsoons, and weak corporate profitability, as pricing power remained low, it said.

Consequently, government tax revenue growth had cooled. At the same time, expenses in 2016 could rise due to pay revisions of civil servants and bank recapitalisation costs. In addition, sluggish private investment had led some policy analysts to suggest that government spending kick-start the process.

“Therefore, fiscal improvements are likely to be limited in the near term. Whether they occur over the medium term will depend on the successful implementation of policy measures that expand the revenue base and/or curtail expenditure commitments,” Moody’s said. However, some of the credit risks posed by continued fiscal weakness were offset to an extent by the government’s access to long-term, rupee-denominated domestic financing. “In this context, the Budget will reveal whether and how the government intends to maintain the trend of modest fiscal deficit reduction of the past few years.”

Based on the trends in revenues and expenditure over the past five years, Moody’s said the fiscal consolidation process remained vulnerable to economic shocks, such as a fall in corporate profits or consumption growth, or an increase in subsidy costs. Although fuel subsidy reform had partially addressed this vulnerability, food subsidies still posed risks.

GOVERNMENT’S FISCAL WOES

• Based on the trends in revenues and expenditure over the past five years, Moody’s said the fiscal consolidation process remained vulnerable to economic shocks, such as a fall in corporate profits or consumption growth, or an increase in subsidy costs
   
• Jaitley had already deferred a fiscal consolidation road map by one year in this year’s Budget
   
• The earlier road map had pegged the fiscal deficit at 3.6% for the current financial year and 3% for the next year
   
• However, the new road map fixed the deficit at 3.9% for the current financial year, 3.5% for 2016-17 and 3% for 2017-18

The fiscal weakness, it said, was partly due to structural factors. Low per-capita incomes of around $1,700 limit the government's tax base and raise pressure for subsidies and development spending.

"Moreover, interest payments absorb almost a fifth of Indian government revenues — a consequence of high debt, which we estimate at 63.8% of GDP in fiscal 2016, down from 83.1% in fiscal 2005. This restricts the government's fiscal flexibility," it said.

Jaitley had already deferred a fiscal consolidation road map by one year in this year's budget. Earlier road map had pegged fiscal deficit at 3.6% for the current financial year and 3% for the next year. However, the new road map fixed the deficit at 3.9% for the current financial year, 3.5% for 2016-17 and 3% for 2017-18.