Spending may lead to fiscal deficit in India: Moody’s
Credit rating agency Moody's upgraded India's sovereign rating. In an interview with Mint, William Foster, vice-president, Sovereign Risk Group, Moody's Investors Service, says lower government revenues this year than planned in the budget and higher government spending could lead to fiscal deficit widening than targeted. Edited excerpts:
Moody's in its report says debt to GDP (gross domestic product) ratio will increase this year by one percentage point to 69%. What justifies a rating upgrade then, since this has been a major drag on India's ratings?
The rating upgrade reflects our expectation that continued progress on economic and institutional reforms will enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term. Recent reforms also offer greater confidence that the high level of public indebtedness which is India's principal credit weakness will remain stable, even in the event of shocks, and will ultimately decline gradually.
Moody's also acknowledges that nominal GDP has slowed following demonetisation and the implementation of goods and services tax (GST). Is the rating upgrade then a pre-emptive move based on future economic gains?
Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns. The range of reforms aimed at improving the business environment, increasing formalisation of the economy or anchoring stable inflation all contribute to further enhancing economy's capacity to absorb shocks.
In the near terms, we have revised our GDP growth forecast down to take into account the immediate impact of demonetisation and disruptions related to GST implementation. We forecast real GDP growth to moderate to 6.7% in the year ending in March 2018. However, as disruption fades, we expect to see a rebound in real GDP growth to 7.5% in the next fiscal year.
Is it advisable for the government to move slower than earlier anticipated on its roadmap for fiscal consolidation to sup-
the port growth? What are the ideal fiscal deficit and debt to GDP ratios that India should aim to achieve?
We forecast the general government budget deficit at 6.5% of GDP this fiscal year, similar to the last two fiscal years. Lower government revenues than planned in the budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted. However, we think that the government's commitment to fiscal consolidation remains. Over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a gradual narrowing of the deficit. Together with robust and sustained nominal GDP growth, this would be conducive to a gradual decline in the government debt burden.
In November 2016, Moody's had kept India's rating unchanged holding that "the reform effort to date has not yet achieved the conditions that would support an upgrade to Baa2, in particular in accelerating private investment to support high, stable growth, without which the government's debt burden-a key constraint on the rating-is likely to remain high for a sustained period."