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Fiscal deficit numbers not to impact India rating immediately: Moody's

By BS Reporter
January 14, 2016 15:07 IST
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A man counts rupee notes in a bank.Meeting or missing the fiscal deficit targets may not lead to immediate change in India’s rating, according to Moody’s Investors Services.

The deficit target could be missed because of the impact of the pay revision of central government employees, said Moody’s and its India associate ICRA Ltd.

“India’s fiscal position is very weak. Even if deficits targets are met, India’s fiscal position will be weaker… so even meeting the target will not be enough and a slight miss is anticipated,” said Atsi Sheth, Moody’s associate managing director, at an event to discuss Moody’s-ICRA 2016 outlook for India.

India plans to keep its fiscal deficit within 3.9 per cent of the gross domestic product in fiscal 2016.

“Global growth has remained subdued. People had expected a recovery particularly in the developed countries. China’s slowdown has been little bit more than expected.

India will suffer from the export slowdown; it will also suffer from the sentiment part,” said Sheth, adding the rating agency expects marginal improvement in the economy.

Moody’s has a ‘Baa3 rating’ on India, which is slightly higher than a junk rating.

“We didn’t change our ratings when India grew at 10 per cent and the general deficit, including the centre and states, fell. Because that reduction was not policy driven but because of very high nominal growth, very high corporate profitability and we didn’t expect it to sustain,” Sheth said.

“We do look at the context and if deficit targets are missed because growth was lower and not because of deliberate policy actions, we do take that into account.

Second, India’s rating already incorporates our view,” she said.

According to Aditi Nayar, senior economist for ICRA, the pay revision of central government employees is likely to boost consumer demand, posing a challenge for fiscal and inflation management.

“We believe that the lagged impact of reforms undertaken by the government, the pay revision for government employees and pensioners, as well as the likely cyclical upturn in agriculture and rural demand will provide a modest boost to economic activity in 2016,” Nayar said.

Government capital expenditure would probably slow down from 2015 level to accommodate the pay revision, as well as the government’s aim to reduce India’s fiscal deficit to 3.5% of the GDP in the financial year ending 31 March 2017, ICRA said

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BS Reporter in Mumbai
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