Mumbai, March 4: The Union Budget 2013-14 unveiled last week offers a "realistic" plan to meet the country's fiscal deficit target, and should be a credit positive for its sovereign ratings, Moody's Investors Service said in a report on Monday.
In its credit outlook, Moody's said, "India announced that the central government's budget deficit for the fiscal year ending 31 March 2013 would equal 5.2 per cent of GDP, and that it would target a deficit of 4.8 per cent of GDP in fiscal 2014. This plan of modest fiscal consolidation is credit positive for the sovereign because, against a backdrop of subdued GDP growth and upcoming elections, it is a realistic effort to correct India's macroeconomic imbalances."
Te country's fiscal consolidation plans could pave the way for monetary easing, thus helping revive economic growth, Moody's added. The extent of easing would depend on whether the Reserve Bank of India, which has noted that 'sustained commitment to fiscal consolidation is needed to generate monetary space,' believes that the government has provided evidence of such a commitment in its budget, the rating agency said.
According to Moody's efforts to rein in the deficits are a step in the right direction because large central government fiscal deficits constrain credit by fueling inflation, crowding out private-sector access to domestic savings and widening the country's current account deficit.
"This plan of modest fiscal consolidation is credit positive for the sovereign because against a backdrop of subdued GDP growth and upcoming elections, it is a realistic effort to correct India's macroeconomic imbalances," Moody's said in its report.
However, the quality of government expenditure reductions was sub-optimal: the government capped growth in capital expenditures at 6 per cent against a budgeted 29 per cent, while actual subsidy spending grew by 18 per cent, compared with a budget forecast that it would shrink by 13 per cent, Moody's noted.
"Fiscal 2014 budget growth assumptions may be optimistic. Achieving such targets will be challenging. In particular, India's divestment revenues have generally been lower than what the government has budgeted. Furthermore, there are still no indications that GDP growth (and hence tax revenues) will accelerate to the extent the government expects. Finally, the subsidy bill is likely to overshoot budget estimates, as it has done the past seven years," Moody's added.
Moody's is the only rating agency, of the three major credit agencies, to have maintained its "stable" outlook on India's ratings. Standard & Poor's and Fitch have the country with a "negative" outlook.
