Global credit rating agency Moody’s belatedly raised its outlook on India’s local currency rating on the very same day that finance minister Pranab Mukherjee told Parliament that the government would bring down its fiscal deficit to 3% of gross domestic product (GDP) after fiscal year 2012.
The fiscal deficit is currently budgeted at 6.8% in 2009-10. Bringing it down to 3% of GDP will be a tall task. India has never managed such a sharp fiscal correction in so short a time, even during the boom we had earlier this decade when tax collections soared.
The parlous state of India’s public finances is the most significant macroeconomic risk right now. Despite the finance minister’s soothing promises, the credibility of the government’s fiscal fitness plans is not very high. So, it is interesting that Moody’s has more or less glossed over the mess in public finances, all the more so given that it has been more pessimistic about India’s credit rating than peers such as Standard and Poor’s and Fitch.
Is it a sign that fiscal fears are receding?