New Delhi: Days ahead of the Union Budget, Moody's Investors Service on February 23 said India's fiscal metrics will remain weaker than its peers in the near term even if Finance Minister Arun Jaitley was to stick to fiscal consolidation roadmap.
Jaitley in his Budget for 2016-17 will on Monday reveal if the credit-positive five-year trend of narrowing budget deficits - from 6.5 per cent of GDP in fiscal 2010 to 4.1 per cent in 2014-15 - will continue. He will also say if the government was on track to reduce deficits to 3.9 per cent and 3.5 per cent of GDP this fiscal year and the next respectively.
Moody's said the importance of the upcoming budget lies in its message on the government's fiscal consolidation plans. The government's fiscal deficits have reduced over the last five years, and this has supported the stabilisation of government debt ratios. Without fiscal consolidation going forward, India's government finances will continue to compare poorly to peers.
"Even if budgetary consolidation continues, India's 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," Moody's said.
Based on the trends in revenues and expenditures over the last 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. The fiscal weakness, it said, was partly due to structural factors. Low per-capita incomes of around USD 1,700 limit the government's tax base and raise pressure for subsidies and development spending.
"Moreover, interest payments absorb almost a fifth of Indian government revenues a consequence of high debt, which we estimate at 63.8 per cent of GDP in fiscal 2016, down from 83.1 per cent in fiscal 2005. This restricts the government's fiscal flexibility," it said.
