High fiscal deficit exposing India to shocks: Moody's

New Delhi: Indian economy is exposed to ‘shocks’ on account of high fiscal deficit and the country's   credit outlook will depend on government's initiatives in the month's budget to contain expenditure and reduce exposure to global commodity prices, rating agency Moody's said today.   "More relevant to (determine) the sovereign credit  outlook will be whether the budget includes measures that   address the government's low revenue base, high current   expenditures and exposure to commodity prices," Moody's said   in a report.   India's budget deficit is high and this increases macro-   economic imbalances and thus "expose the economy to shocks",   Moody's Investors Service said in the report titled:   "Frequently asked questions on India's fiscal position and the   forthcoming budget". 

"In absence of measures to reduce the fiscal deficit, the   future high growth rates many forecast for India may not be   realised. The July budget could indicate whether fiscal   constraints on India's sovereign credit profile will ease over   the coming years," Moody's said.   The Union Budget is expected to be presented in the   second week of July.   Whether the new government's FY2015 deficit estimate is   above or below the previous regime's estimate of 4.1 per cent   of GDP, it will not be the key determinant of India's credit   outlook, Moody's said.

The deficit in 2013-14 fiscal was 4.5  per cent.   Moody's assigns a 'Baa3' rating on India, with a stable   outlook.   "India's high budget deficits are partly due to a large   population and low per capita income levels. Low income levels   limit the government's tax revenue base and at the same time   drive socio-political pressure to increase government spending   on subsidies and economic development," it added.   However, Moody's said that other countries with low per   capita income have avoided deficits as large as India's. This   suggests that fiscal discipline can improve budget outcomes   despite structural challenges.  

The report added that wide budget deficits have kept   India's inflation high and contributed to a widening current   account deficit between 2011 and 2013, which heightened   exchange rate volatility and resulted in higher domestic   interest rates.   These trends have exacerbated the slowdown in GDP growth   since 2011, it added.  

The report outlines the reasons behind India's high   fiscal deficits, provides a comparison between recent fiscal   developments in India and in other similarly rated countries,   explains how fiscal policy has affected growth and addresses   the possible credit implications of the newly elected   government's forthcoming budget.