Weak fiscal strength to remain key credit challenge for India: Moody's

Agency says it may be challenging for govt to push through material revenue reform given general elections that need to be held by mid-2024, as well as various state elections before then

Indian economy’s fiscal strength is unlikely to improve in the medium term, thus remaining a key credit challenge compared with peers, even as the FY23 budget’s focus on capital expenditure will support near-term growth, rating agency Moody’s Investors Service said on Friday.

“The government did not foreshadow any potentially significant measures to broaden the tax base, appearing to rely on healthy tax buoyancy and increasing tax compliance to drive revenue, at least through the forthcoming budget year. Moreover, it may be challenging for the government to push through material revenue reform given general elections that need to be held by mid-2024, as well as various state elections before then,” the rating agency said.

India's budget projects a narrowing in the central government deficit to 6.4% of GDP in FY23 from an estimated 6.9% in FY22. The budget is characterised by a continued emphasis on rising capital expenditure to sustain growth momentum near term, as the economy continues to rebound from its pandemic trough. “While conservative budget assumptions leave room for the government to respond to prevailing macroeconomic and pandemic risks over the next year, the path toward the government’s medium-term deficit target of 4.5% of GDP by fiscal 2025 (FY26) remains undefined,” Moody’s said.

Economic Affairs secretary Ajay Seth told Business Standard in an interview that the government didn’t come out with a medium term fiscal consolidation roadmap since there is still uncertainty around the pandemic. “The global financial scenario is also a bit uncertain how it will play out although the economy is in a far stronger position. What is important is to assure stakeholders, especially the market, that the government is on the track of fiscal consolidation. So that part has been done,” he added.

Moody’s said continued government spending on infrastructure projects will drive demand for key user industries such as steel, cement, housing and solar photovoltaic (PV) module manufacturers, as well as downstream oil companies. “Support for medium, small and micro enterprises is credit positive for banks and nonbank financial companies. The expansion of the quantum of and period for securing government-guaranteed working loans for medium, small and micro enterprises (MSMEs) will support banks' and nonbank financial companies' (NBFCs) asset quality. Introduction of the digital rupee will further increase payment efficiency and financial inclusion,” it added.