Moody's Investors Service, which has been maintaining stable outlook on India's sovereign ratings even as it peers cut it to negative, today cast its vote against the Food Security Bill, passed by the Lok Sabha earlier this week.
It said the move is credit negative for the Indian government as it will push up its subsidies. The Moody's statement came even as the government has been saying that the proposed law will have only marginal impact on the fiscal situation of the Centre.
Moody's also attributed sharp depreciation in the rupee against the dollar partly to high current account deficit, which is also affected by the fiscal imbalance.
"The measure is credit negative for the Indian government because it will raise government spending on food subsidies to about 1.2% of GDP per year from an estimated 0.8% currently, exacerbating the government’s weak finances," Moody's said in the statement.
However, it will not significantly affect the fiscal position of the government in 2013-14 because the law might come into force only in the last few months of the financial year.
"It will raise future subsidy expenditure commitments, hindering the government’s ability to consolidate its finances," the statement added.
Moody's said India's fiscal deficit contribute to the current account deficit (CAD) by keeping domestic demand high, thus increasing imports.
"Loose fiscal policy has also underpinned recurrent inflationary pressures. Inflation further widens the current account deficit by lowering the competitiveness of exports and of import-competing sectors," it said.
Finance Minister P Chidambaram had said reining in the Centre's fiscal deficit at 4.8% of GDP in the current financial year from 4.9% in 2012-13 is a red line which will not be breached.
Yesterday, food minister K V Thomas had told Business Standard that there is existing targeted public distribution system (TPDS). Any governments in power either at the Centre or states cannot do without it. In the TPDS system, based on 2000 census and 1992-93 population, the food subsidy is Rs 1,09,000 crore. Now 2011 census is available, so the Centre is bound to implement the TPDS as per the 2011 census, which would have pushed up the subsidy automatically to Rs 1,13,000 crore, leaving apart ICDS, mid-day meal schemes etc.
After the food bill, the burden is just additional Rs 10,000 crore a year.
Chidambaram had also pegged India's CAD to $70 billion this financial year against $88 in 2012-13. It would mean cutting CAD to 3.7% of GDP in 2013-14 from the record 4.8% in the previous year.
Moody's said India’s current account deficit has widened in recent quarters, peaking at 6.8% of GDP in the quarter ending December 2012 from an average of 1% in the first half of the 2000s. "The almost 18% depreciation of the Indian rupee against the US dollar over the past three months partly reflects this widening," it said.
Moody's has been retaining outlook on India's ratings to stable, even as Standard & Poor's and Fitch had downgraded it to negative. Later, Fitch also upgraded the outlook to stable. All the three rating agencies have assigned India the lowest investment grade and any downgrade would push the score to junk.