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Sovereign rating depends on productive growth: Moody's

The decision to reduce the fiscal deficit to 3% of GDP over three years does not come as a surprise, says analyst Atsi Sheth

IANS  |  Mumbai 

Arun Jaitley, Budget

The sovereign credit rating implications of the first full of the Prime Minister Narendra Modi's government depends on increased production and improved India's international competitiveness, said credit rating agency Moody's Investors Service Friday.

Reacting to the union 2015-16 presented by Finance Minister Arun Jaitley, Moody's sovereign analyst Atsi Sheth, Sovereign Risk Group, told IANS: "The sovereign credit implications of the will depend on whether the choice to growth over fiscal consolidation leads to more productive growth and improves India's international competitiveness." Read our full coverage on Union Budget

Moody's rates India at "Baa3", the lowest investment grade rating, with a "stable" outlook, in line with the ratings of other agencies like Standard & Poor's and Fitch Ratings.

"The budget underscores our view that government finances are likely to remain a constraint on India's sovereign credit profile: fiscal consolidation appears difficult to achieve even by a government with a considerable parliamentary majority and during a period of accelerating economic growth," Sheth said.

"From our perspective, even if the central government's deficit fell to three percent of GDP (gross domestic product), India's general (state + central) government fiscal deficit would remain well above that of most countries we rate," Sheth added.

According to Sheth, the decision to reduce the fiscal deficit to three percent of GDP over three years, instead of two as proposed in July 2014, does not come as a surprise.

The measures in the budget will support consumption and investment growth.

But this support to growth comes at a fiscal cost and the government's fiscal position remains weak, relative to similarly rated sovereigns.

Simplification of the corporate tax system (reduction in basic rate, removal of exemptions) and clarity on GAAR could benefit private investment.

"We see the introduction of the GST (Goods and Services Tax) and proposed direct cash subsidy transfer as measures that could have credit positive implications -- although the benefits are several years away," Sheth said.

According to Sheth, the implementation of a direct cash subsidy transfer system may be similarly transformative, if it achieves its goal of eliminating subsidy leakages.

"This will have welfare and efficiency benefits, and while it won't reduce subsidy expenditure, it could reduce the increase in subsidy expenditure, which has been a major contributor to widening fiscal deficits in the past," Sheth added.

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First Published: Sat, February 28 2015. 16:00 IST