Lower taxes, higher public expenditure could widen budget deficit in 2017-18, cautions Moody's

New Delhi: Lower taxes and higher public expenditure could widen budget deficit in 2017-18, but steps taken by the government to broaden the tax base and improve spending efficiency would help in narrowing it going forward, US-based rating agency Moody’s said.

In an interview to PTI, Moody’s Investors Service VP (Sovereign Risk Group) William Foster said the agency believes that the government’s commitment to fiscal consolidation remains and sustained growth would help it reduce debt burden.

Moody’s had last week raised India’s sovereign rating for the first time in over 13 years, saying growth prospects have improved with continued progress on economic and institutional reforms. The rating was upgraded to Baa2 from Baa3 and rating outlook was changed to stable from positive.

Foster said the upgrade reflects the expectation that continued progress on economic and institutional reforms will enhance India’s high growth potential and its large and stable financing base for government debt and will likely contribute to a gradual decline in the general government debt burden over the medium term.

Pic courtesy: Reuters

India’s debt-to-GDP ratio stood at 68.6 percent and a government-appointed panel has recommended lowering it to 60 percent by 2023.

“We forecast the general government budget deficit at 6.5 percent of GDP this fiscal year, similar to the last two fiscal years. Lower government revenues than planned in the Budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted.

“However, over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a gradual narrowing of the deficit. Together with robust and sustained nominal GDP growth, this would be conducive to a gradual decline in the government debt burden,” Foster said.

Foster, however, added that a material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating.

General budget deficit includes expenditure incurred and revenue earned by both the Centre and States.

“The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply,” he added.

The central government, in Budget 2017-18, had set a target of 3.2 percent for fiscal deficit, which is the difference between the Centre’s revenue and expenditure, for this fiscal. It would be brought down to 3% next fiscal.

The Finance Ministry is scheduled to review the deficit target for the current financial year next month as it re- assesses revenue mop-up from the recently launched Goods and Services Tax (GST) and PSU disinvestment programme. The deficit has already touched 91.3% of the target in the first half of the fiscal.

Projecting GDP growth to moderate to 6.7 percent in the current fiscal, from 7.1 percent in 2016, Moody’s said while GST and demonetisation have undermined growth over the near term, growth will rise to 7.5 percent in 2018-19 as the disruption fades.

According to Foster, the stable outlook denotes that Moody’s does not expect a rating change in the foreseeable future. “There are both positive and negative risks to the economy and India’s credit profile,” Foster added.

His assessment is a material strengthening in fiscal metrics, combined with a strong and durable recovery of the investment cycle, probably supported by significant economic and institutional reforms would be credit positive.

“In particular, greater expectation of a sizeable and sustained reduction in the general government debt burden, through increased government revenues combined with a reduction in expenditures, would put positive pressure on the rating. Implementation of key pending reforms, including land and labour reforms, could put additional upward pressure on the rating,” Foster said.