New Delhi: Finance minister Arun Jaitley’s fourth budget has emphasized fiscal prudence while pushing for higher public investment—a “credit positive” for India’s sovereign ratings, Moody’s Investors Service said on Friday.
Rating company Fitch also reacted positively to the continued commitment to fiscal consolidation and a broad reform agenda displayed in the 2017-18 budget presented on Wednesday.
“We view the (budget) speech as consistent with the government’s commitment to gradual fiscal consolidation and balanced growth, a credit positive for the sovereign ratings,” Moody’s Investors Service said in a report.
Jaitley chose to only marginally deviate from the fiscal consolidation road map by targeting a fiscal deficit equivalent to 3.2% of gross domestic product (GDP); he aims to bring it down to 3% in 2018-19.
The initial road map required the finance minister to contain fiscal deficit at 3% of GDP in 2017-18 from 3.5% in 2016-17.
“The revised fiscal consolidation path is not materially different from the previous road map and our projections. We expect the government will meet its deficit targets, based on achievable budget assumptions and demonstrated commitment to fiscal prudence. However, given significant spending commitments and structural hurdles to rapid increases in revenue collection, there will be limited room for slippage,” the Moody’s report said.
The credit assessor also favoured the recommendations of a panel led by former revenue secretary N. K. Singh that reviewed the Fiscal Responsibility and Budget Management (FRBM) Act.
The panel favoured making the debt-to-gross domestic product (GDP) ratio the new metric. It suggested targeting a debt-to-GDP ratio of 60% by 2023—40% of GDP for the central government and 20% for the states.
To achieve these targets, the panel has recommended a fiscal deficit of 3% of GDP for the next three years. But it included an escape clause for deviations up to 0.5% of GDP, based on triggers including far-reaching structural reforms in the economy with unanticipated fiscal implications, acts of war and farm distress.
“We consider the committee’s targets to be achievable. They imply gradual medium-term fiscal consolidation, driven largely by higher nominal GDP growth and bolstered by improvements in government revenue collection. High and sustainable nominal GDP growth will depend on the recovery of the private investment cycle, which will in turn be contingent upon the successful implementation of current and future reforms,” Moody’s said.
The report also said the government’s revenue projections are realistic though it cautioned the divestment targets appear ambitious. “The administration has budgeted gross tax revenue to rise by 12.2% year-on-year. This implies a tax buoyancy of about 1.04, which we consider to be realistic,” it said.
The divestment target set by the government for 2017-18 is Rs72,500 crore, as against a budgeted target of Rs56,500 crore for 2016-17, which was revised down to Rs 45,500 crore. “A shortfall in disinvestment receipts could pressure the government to cut back in other areas of spending, including capital expenditure,” it said.
The report also cautioned the government risks a slippage in expenditure projections because of uncertainty over compensation to be paid to states for potential shortfalls in revenue after the goods and services tax (GST) comes in, and outgo on account of 7th Pay Commission suggestions.
Moody’s said the states’ fiscal deficit targets may be missed because of uncertainty surrounding the final impact of demonetization and the impending GST on their revenues.
Fitch said: “The government’s fiscal deficit to 3.0% of GDP has been pushed back by another year, but the general goal of addressing relatively weak public finances over the medium term is still in place.”