Budget credit positive for India Inc, fiscal challenges remain: Moody's

The path toward the government's medium-term deficit target of 4.5% of GDP by FY25 remains undefined.

Rating agency Moody’s said the government’s Budget for FY 2022-23, with emphasis on capital expenditure to support growth, is credit positive for non-financial companies, financial institutions, but poses long-term fiscal challenges for the sovereign.

There is continued emphasis on rising capital expenditure to sustain growth momentum near term, as the economy continues to rebound from its coronavirus (Covid-19) pandemic trough, the rating agency said in a report. India’s sovereign rating is "Baa3 stable".

The conservative Budget assumptions leave room for the government to respond to prevailing macroeconomic and pandemic risks over the next year. However, the path toward the government’s medium-term deficit target of 4.5 per cent of Gross Domestic Product (GDP) by FY25 remains undefined.

India's Budget, presented on February 1, 2022, projects a narrowing in the central government deficit to 6.4 per cent of GDP in FY22 from an estimated 6.9 per cent in FY21.

The expenditure pressures are likely to rise beyond the near-term retrenchment from pandemic-driven stimulus. Despite the pullback in spending from a peak in FY20, the Budget is still larger as a share of GDP than the average over the 10 years before the Covid-19 pandemic.

Moreover, rising interest rates could push up already high debt servicing costs and worsen debt affordability, as measured by interest payments to revenue.

The government did not foreshadow any potentially significant measures to broaden the tax base. It appears to rely on healthy tax buoyancy and increasing tax compliance to drive revenue, at least through the forthcoming Budget year.

Moody’s said 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. India’s fiscal strength is therefore unlikely to increase and will remain a key credit challenge compared with peers.

The public spending will remain high for highways and railways and sovereign green bonds will mobilise funding for public projects to reduce carbon intensity. High infrastructure spending is positive for companies in this sector. The government also announced plans to issue green bonds, and increased incentives to support solar power.

The continued government spending on infrastructure projects will drive demand for key user industries, a credit positive. Conditions will remain supportive for most nonfinancial companies in fiscal 2023.

The Budget is positive for steel, cement, housing and solar photovoltaic (PV) module manufacturers, as well as downstream oil companies, Moody’s added.