India: FY18 budget deficit to increase but it will improve subsequently: Moody’s

  • Moody’s Investors Services said that steps taken by the government to broaden the tax base and improve spending efficiency would help in narrowing the budget deficit going forward.
  • The US-based rating agency said that lower taxes and higher public expenditure could widen budget deficit in 2017-18. Last week, Moody’s had raised India’s sovereign rating for the first time in over 13 years.
  • The rating was upgraded to Baa2 from Baa3 and rating outlook was changed to stable from positive. It said that growth prospects have improved with continued progress on economic and institutional reforms.
  • In an interview to PTI, Moody’s Investors Service V-P (Sovereign Risk Group) William Foster said the agency believes that the government’s commitment to fiscal consolidation remains and sustained growth would help it reduce debt burden.
  • Foster said the upgrade reflects the expectation that continued progress on economic and institutional reforms will enhance India’s high growth potential and its large and stable financing base for government debt and will likely contribute to a gradual decline in the general government debt burden over the medium term.
  • India’s debt-to-GDP ratio stood at 68.6% and a government-appointed panel has recommended lowering it to 60% by 2023. “We forecast the general government budget deficit at 6.5% of GDP in FY18, similar to the last two fiscal years. Lower government revenues than planned in the Budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted.
  • “However, over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a gradual narrowing of the deficit. Together with robust and sustained nominal GDP growth, this would be conducive to a gradual decline in the government debt burden,” Foster said.
  • The central government, in Budget 2017-18, had set a target of 3.2% for fiscal deficit, which is the difference between the Centre’s revenue and expenditure, for this fiscal. It would be brought down to 3% next fiscal. The finance ministry is scheduled to review the deficit target for the current financial year in Dec 17 as it re- assesses revenue mop-up from the recently launched Goods and Services Tax (GST) and PSU disinvestment programme.
  • Projecting GDP growth to moderate to 6.7% in the current fiscal, from 7.1% in FY17, Moody’s said while GST and demonetisation have undermined growth over the near term, growth will rise to 7.5% in FY19 as the disruption fades. According to Foster, the stable outlook denotes that Moody’s does not expect a rating change in the foreseeable future.

External Link :