“The government could overshoot its deficit target for fiscal 2019 if tax revenue underperforms projections, as it did last year. Given implementation challenges, changes to goods and services tax (GST) rates in 2018, and prospects for continued weaker growth, we consider this to be a material risk," Moody’s said in a detailed analysis of the 5 July budget.
Sitharaman lowered the government’s fiscal deficit target slightly from 3.37% of gross domestic product (GDP) announced in February’s interim budget to 3.34% of GDP.
The government has budgeted for gross tax revenue growth of 9.5% in fiscal 2019, down from the 12.4% announced in February, and 17.2% in fiscal 2018. That results in a gross tax revenue of 11.7% of GDP in fiscal 2019, versus about 11.9% for fiscal 2018.
Moody’s pointed out that the government now projects a more gradual decline in debt-to-GDP ratio at 48% in 2019-20 compared with 46.7% in the interim budget, 46.2% in 2020-21 as against 44.6% targeted in interim budget.
“The budget documents no longer reference an earlier pledge to cut central government debt to 40% of GDP by fiscal 2024, based on the FRBM Committee’s recommendation," it added.
The rating agency said a weaker starting point for fiscal consolidation and optimistic nominal growth assumptions make it less likely that the government will achieve its goal of narrowing the deficit to 3% of GDP by 2020-21. “That indicates that the fall in debt to GDP will be slower than the authorities project. Additionally, we expect that wider state deficits will hinder fiscal consolidation at the general government level," it added.
A weak fiscal position has been India’s main credit rating challenge, with government debt of 67.5% of GDP in 2018-19, above the 52% for similarly-rated economies and debt-interest costs almost three times the peers.
Moody’s said simultaneously delivering on fiscal consolidation and raising living standards will be extremely challenging, especially since growth is likely to remain weak over the coming year. “We expect India’s economy to expand 6.8% in real terms and 11.0% in nominal terms in fiscal 2019," it added.
The rating agency said higher reliance on one-off income is credit negative, since it represents a less stable funding source than recurring taxes and fees. “It also highlights the challenges the authorities face in reducing the fiscal burden, while delivering on stronger economic growth, job generation and better quality of life for its citizens, particularly in rural areas," Moody’s added.
The government has raised its disinvestment target for fiscal 2019 to ₹1.1 trillion from ₹800 billion in the February statement. The budgeted target for dividends from the RBI and public sector banks of ₹1.6 trillion was essentially unchanged from February.
Moody’s said the finance minister’s announcement that the government would consider lowering its holdings in India’s public sector companies to less than a majority stake, where appropriate, will be subject to market conditions, investor sentiment and potential political constraints. “With the exception of fiscal 2017, disinvestment receipts have recently fallen short of budgeted amounts, which is also a risk for the current fiscal year," it added.
Moody’s said the government’s announcement that it could reconsider its policy of holding a minimum stake of 51% in government-owned non-financial companies could have credit-negative implications for Indian Oil Corporation Ltd (IOCL, Baa2 stable), Bharat Petroleum Corporation Limited (BPCL, Baa2 stable) and Oil India Limited (OIL, Baa2 stable).