Fix your fisc, Moody's tells India

Moody's Investors Service might not lower India's sovereign credit rating if Finance Minister Arun Jaitley goes easy on the fiscal deficit so long as his maiden Budget next month tries to heal the deeper malaise in government finances.

"Whether the new government's 2014-15 fiscal deficit estimate is above or below the previous government's projection of 4.1 per cent of gross domestic product (GDP) is not the key determinant of India's credit outlook. More relevant will be whether the Budget includes measures that addresses the government's low revenue base, high current expenditure and exposure to commodity prices," the credit rating agency said in a report on Thursday.
 

Moody's assigns lowest investment grade to India. Its comments came a few weeks after Indian-born economist Arvind Panagariya said there is nothing wrong if the government widens its overspending to 4.5 per cent of GDP in 2014-15 to boost the economy's growth. But, reasoning of Moody's is different from Panagariya's.

VIEWS MATTER

• LOW RATINGS: Three rating agencies have assign the lowest investment grade to India; ratings by these agencies are important to guide foreign investors putting money in India
• BORROW ISSUES: The ratings are important also for the cost of funding by Indian companies accessing money abroad
• BLEAK PHASE: India was under the threat of a rating downgrade for a large part of the later years of the UPA govt’s second term
• WEAK OUTLOOK: Standard & Poor’s and Fitch Ratings in 2012 revised outlook on India to negative from stable (in 2013, Fitch reverted to a stable outlook)
• STIFF BENCHMARKS: India’s fiscal concerns are one of the most important parameters for these agencies to decide on the grade assigned to the country

"We do not expect a significant reduction in the deficit in the nine remaining months of this financial year," Moody's said, but added: "In the absence of measures to reduce the fiscal deficit, the future high growth rates many forecast for India may not be realised."

India's growth has been below five per cent in the past two years but the World Bank has predicted the economy will expand by 5.5 per cent this financial year, 6.3 per cent the next and 6.6 per cent in 2016-17.

"The Budget in July could indicate whether fiscal constraints on India's sovereign credit profile would ease over the coming years," Moody's said, pointing out that India's Budget deficits increased its macroeconomic imbalances and exposed the economy to shocks.

"Low income levels limit the government's tax revenue base and, at the same time, drive socio-political pressure to increase government spending on subsidies and economic development," the rating agency said. Other countries with low per-capita incomes have avoided deficits as large as India's, it added.

Brazil's fiscal deficit is expected to be four per cent in 2014 and Argentina's 1.8 per cent. India's fiscal deficit, which was 4.5 per cent in 2013-14, was projected to narrow to 4.1 per cent in 2014-15 in the interim Budget presented by former finance minister P Chidambaram.

Moody's noted big deficits had kept India's inflation high and contributed to a widening current account deficit between 2011 and 2013, heightening exchange-rate volatility and pushing interest rates. These trends exacerbated the economic slowdown since 2011, it said.

India's growth rate fell to 6.7 per cent in 2008-09 from nine per cent in the previous three years because of the global financial crisis. The economy recovered to grow at 8.6 per cent in 2009-10 and 8.9 per cent in 2010-11. It dipped to 6.7 per cent a year later and then to below five per cent in the next two years.