India’s fiscal metrics would remain weaker than its peers in the near term even if the fiscal deficit target of 3.5% of GDP for the next financial year was adhered to in the Budget, Moody’s Investors Service said on Tuesday.
“The importance of the Budget lies in its message on the government’s fiscal consolidation plans,” Moody’s said. According to the revised fiscal consolidation road map, the deficit was to be cut from 3.9% in 2015-16 to 3.5% in 2016-17 and further to 3% in 2017-18.
The Centre’s fiscal deficit has reduced over the past five years, and this has supported the stabilisation of government debt ratios. “But at around 63.8% of GDP, India’s government debt ratio remains high compared to the median of 49.5% for Baa3-rated peers. Without continued fiscal consolidation, government finances will continue to compare poorly to peers,” it said.
Even if budgetary consolidation continues, fiscal metrics will remain weaker than rating peers in the near term, because of the relatively high level of India’s state and central government deficits and debt, it said.
Based on the trends in revenues and expenditures over the past five years, Moody’s said the fiscal consolidation process remains vulnerable to economic shocks, such as a fall in corporate profits or consumption growth, or an increase in subsidy costs.
Although fuel subsidy reform has partially addressed this vulnerability, food subsidies still pose risks, it said. The fiscal weakness, it said, was partly due to structural factors. Low per capita incomes of around $1,700 limit the government’s tax base and raise pressure for subsidies and development spending.
“Moreover, interest payments absorb almost a fifth of the government revenues – a consequence of high debt, which we estimate at 63.8% of GDP in FY16, down from 83.1% in FY15. This restricts the government’s fiscal flexibility,” it said. In addition, certain cyclical factors and unanticipated developments augment fiscal pressures. “For instance, despite a robust GDP growth above 7% in FY15, rural demand and corporate profitability remained subdued, weighing on tax revenues,” it said.