North Block which houses the Ministry of Finance. (Photographer: Prashanth Vishanathan/Bloomberg)

Moody’s Expects India To Meet Its FY19 Fiscal Goal

Rating agency Moody’s Investors Service expects India to meet its fiscal deficit target for the financial year 2018-19, it said in a release today. The Indian government breached its fiscal deficit target of 3.2 percent of GDP, but managed to meet its revised target of 3.5 percent for FY18.

For FY19, the target has been set at 3.3 percent, suggesting moderate consolidation over last year. Moody’s believes the budget assumptions are achievable but acknowledges that the government may need to cut planned expenditure.

Although Moody’s sees some downside risk to budgeted revenue and expenditure targets, it expects that the government would cut back on planned capital expenditure, as has occurred in past years, if it is needed to offset any slippage from its fiscal targets.
William Foster, Vice President and Senior Credit Officer, Moody’s

The expenditure cuts could become necessary should there be a shortfall in revenue. The strain on revenue could emerge from a cut in excise duties on oil or subdued GST collections. The ongoing uncertainty around GST implementation and compliance could result in some potential revenue losses, Moody’s said.

Also read: How The Government Met Its FY18 Fiscal Goal

ICRA, the local affiliate of Moody’s, also sees some possible concerns emerge from a shortfall in divestments and dividends in FY19.

Certainly with GST we need to see how the full year plays out. April and May were encouraging in the sense that the numbers have been higher than what we saw last year. Once the e-way bill stabilises, we are hopeful that we will get a good GST number for the year as a whole. The concern is whether the excise duty will end up being cut because of higher crude oil prices. Also, we need to be watchful of the dividends that come in for the full year and disinvestment.
Aditi Nayar, Principal Economist, ICRA

Moody’s also believes that India is well fortified on the external front, even though it expects the current account deficit to widen in the current year. India’s current account deficit could widen to 2.4 percent of GDP in FY19 from 0.7 percent of GDP in FY17, ICRA said.

However, the economy has adequate forex reserves which are enough to cover 10 months of imports based on the FY18 import bill. “India is in a much stronger position than it used to be compared to 2013,” said Foster in an interview to BloombergQuint.

In November last year, Moody’s upgraded India’s sovereign rating for the first time in 14 years. The rating upgrade was premised on a number of reforms including the implementation of GST, the bankruptcy code and the new monetary policy framework.

However, concerns over the implementation of GST continue and the extent of recoveries using the bankruptcy code is also uncertain. Given that, peer rating agencies like Standard & Poor’s and Fitch have chosen not to upgrade India’s lowest investment grade rating just yet.

When asked whether Moody’s decision was a leap of faith that India’s reforms will pay off, Foster said the rating upgrade was based more on a relative comparison between countries.

I wouldn’t call it leap of faith. We are not in the business of faith. It is relative comparison of countries. And India has improved in expectations at the policy level, which is put forward in reforms which will continue to strengthen the country’s profile relative to others.
William Foster, Vice President and Senior Credit Officer, Moody’s

Watch the full interview here: