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

Moody’s Cautions On Fiscal Risks A Week Ahead Of Budget

The proposed farm income support scheme, along with recent support measures introduced to support small businesses, will make it tougher for the Indian government to stick to the path of fiscal consolidation, said ratings agency Moody’s Investors Service.

The cautionary note comes a week ahead of the budget presentation on Feb.1. While the government has maintained that it will meet its fiscal deficit target of 3.3 percent of GDP for FY19, Moody’s fears there may be a small slippage for a second consecutive year. Last year, the government revised its fiscal deficit target in the middle of the year from 3.2 percent to 3.5 percent.

We currently expect the central government’s fiscal deficit to reach 3.4 percent of GDP in the financial year ending March 2019, marginally higher than the budgeted target of 3.3 percent of GDP.  
Moody’s Investors Service

The rating agency added that despite lower-than-planned expenditure, weakening revenue has resulted in the government already exceeding its full year deficit target for fiscal 2018. By November, the fiscal deficit was at 114 percent of the budgeted target.

The fiscal slippage risk may go beyond the current budget.

The government is widely expected to announce a farm support package as part of the budget presentation. That, together with other recent schemes announced to support small and medium enterprises, could mean that medium-term fiscal goals may also be compromised, unless attempts are made to push-up revenue generation as well.

“The proposed measures will cause further slippage from India's fiscal consolidation roadmap as the government targets narrowing deficit to 3.1 percent and 3 percent of the GDP in fiscal 2019 and fiscal 2020, respectively,” Moody’s said.

New policy measures already announced include the GST Council’s decision to double the income tax exemption limit for companies to Rs. 40 lakh in annual revenue from Rs. 20 lakh earlier. These changes were made in a meeting on Jan. 10, 2019 and will come into effect from the next financial year beginning April 2019. Preceding this revision, the government had cut sales tax on 20 items in December 2018.

Noting that the recent changes follow several cuts to GST rates since implementation, Moody’s said that they could further weigh on tax revenue collection in the near term.

Additionally, proceeds from divestment of government assets have so far amounted to only 42.7 percent of the Rs. 80,000 crore that the government had originally planned to raise through the route. Measures such as seeking higher dividend payments from the central bank and attempting to sell stake in public banks may only provide temporary reprieve, the ratings agency said.

“Achieving deficit reduction through such unpredictable revenue sources denotes weaker fiscal policy effectiveness,” cautioned the agency.