New Delhi: Moody's Investors Service on Tuesday said the Indian government will face challenges in achieving its fiscal deficit target for the year ending March 2021 amid persistent structural and cyclical headwinds to growth.

Finance minister Nirmala Sitharaman in her Budget 2020 speech proposed reducing fiscal deficit by 30 basis points to 3.5% of GDP in 2020-21.

Sitharaman invoked the escape clause to take a 50 basis points leeway in the fiscal deficit number for 2019-20, taking the revised estimate to 3.8% of the GDP.

"While the latest budget targets a narrower deficit, prolonged weakness in nominal GDP growth in India, combined with lower revenue collections, has dampened the outlook for fiscal consolidation, raising the risk that the debt burden may not stabilize," said Gene Fang, Moody's associate managing director.

Sitharaman said the Budget has assumed a nominal GDP growth of 10% for 2020-21. The Economic Survey had said the economy would grow at 6-6.5% in 2020-21 from the estimated 5% in the financial year ending 31 March.

"The debt burden is sensitive to nominal GDP growth, which we expect will remain lower on average than in the past. In light of India's weak fiscal health compared with its rating peers, any slippage in debt reduction will be credit negative," Fang added.

According to the data released by the Controller General of Accounts (CGA), the government's fiscal deficit touched 132.4% of the full-year target at December-end mainly due to slower pace of revenue collections. In actual terms, the fiscal deficit or gap between expenditure and revenue was 9,31,725 crore. The deficit was 112.4% of 2018-19 Budget Estimate (BE) in the corresponding period of the previous year.

Moody’s also said, the five-​fold increase in bank deposit insurance to 5 lakh per deposit holder is credit positive for banks, as it will raise depositors’ confidence and bank funding, particularly across small and medium-sized private sector and cooperative banks.

The rise in public infrastructure spending and tax exemptions for sovereign wealth funds are also credit positive for infrastructure companies, as public capital outlays on highways and railways will increase modestly. Additionally, the 100% tax exemption on income and capital gains for infrastructure investment made by sovereign wealth funds will attract more long-term foreign capital, Moody’s added.

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