Moody's on the Budget

The modest fiscal consolidation plan unveiled in the 2013-14 Union Budget by the Indian government is a realistic effort to correct the country’s macroeconomic imbalances against a backdrop of subdued economic growth and upcoming polls and is credit positive for its sovereign ratings, Moody’s Investors Service said.
In his Budget for 2013-14, finance minister P Chidambaram kept the fiscal deficit for 2012-13 at 5.2% of gross domestic product (GDP), a shade under the estimated 5.3%, and vowed to rein it in at 4.8% of GDP in the next fiscal year
“Fiscal consolidation could pave the way for monetary easing, which would revive growth. 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 global ratings agency said in a report.
“The fiscal 2013 outcome demonstrates the sovereign’s commitment to the Budget target. Efforts to rein in India’s deficits are a step in the right direction because large central government fiscal deficits constrain credit by fuelling inflation, crowding out private-sector access to domestic savings and widening the country’s current account deficit,” Moody’s said.
The government has been battling to avert a ratings downgrade after a series of warning from global ratings agencies last year about the state of the country’s public finances. Moody’s has a stable outlook on India’s sovereign rating while Standard & Poor’s and Fitch have a negative outlook.
A ratings downgrade would have hurt capital flows, made it expensive for Indian companies to raise foreign loans and hurt overall sentiment at a time when growth was slowing. But a series of policy measures since September and a clear commitment to fiscal goals by the finance minister has helped reverse the gloomy predictions and nurse the economy back to its growth path.
Moody’s said that the 2014 Budget growth assumptions may be optimistic and called for a similar effort next year to tame the deficit.
“The Indian government will need a similar commitment and implementation capacity to meet its fiscal 2014 deficit target of 4.8% of GDP, but we consider many of its assumptions optimistic,” Moody’s said.
“The fiscal 2014 Budget assumes nominal GDP growth of 13.4% and total revenue growth of 23.4%, including a doubling of revenue from divestments. It also anticipates total expenditure growth of 16.4%, with 29% growth in planned spending and a 10% reduction in subsidy spending,” the agency said.

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