Atsi Sheth, Senior Vice President, Sovereign Risk Group Moody's Investors Service, Inc.
Moody's look at the credit implications for the Indian sovereign:On Thursday, the Government of India announced plans to lower the central government's budget deficit to 3.0% of GDP by fiscal 2017 (ending 30 March 2017) from its forecasted 4.1% of GDP in fiscal 2015. A smaller fiscal deficit would be credit positive since India's weakening public finances have fuelled inflation, raised domestic interest rates and heightened macroeconomic imbalances, constraining sovereign credit quality.
However, the budget did not include specific revenue and expenditure measures to shrink the deficit, suggesting that various options are still under consideration. For instance, the government announced its intention to reduce subsidy spending, but did not outline changes to the current subsidy regime. Similarly, in its plan to implement a goods and services tax, it did not specify how it would resolve disagreements with state governments that have stymied implementation for years. This lack of detail makes it difficult to assess the feasibility and sustainability of the fiscal consolidation effort.
Moreover, the revenue assumptions underpinning the current fiscal year's deficit target may prove too high if GDP growth does not accelerate significantly from our current projection of around 5% GDP growth for fiscal 2015.
The budget includes measures to support faster economic growth, such as allowing greater foreign direct investment in insurance and defence, increasing spending on infrastructure, and introducing tax incentives for savings and investment. These policies are credit positive for the corporate and infrastructure sectors, as we explain in the sections below. However, their effect on overall GDP growth will be muted without a decline in inflation, interest rates and regulatory constraints on private investment.
Unless the budget is followed by a more specific implementation plan, as well as additional measures to address macroeconomic imbalances, its credit effect will be modest.
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