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  3. High fiscal deficit exposing India to shocks: Moody's

High fiscal deficit exposing India to shocks: Moody's

20 Jun 2014 Evaluate

Global rating agency Moody's underscored that sovereign credit outlook for India, would not depend on whether the Narendra Modi-led government keeps fiscal deficit target for 2014-15 below or above 4.1% of GDP set by the previous government, but will be based on measures outlined in next month's full budget to address lower revenue base, high current expenditure and exposure to global commodity prices. In a report titled, ‘‘frequently asked questions on India's fiscal position and the forthcoming budget', Moody’s underscored that India’s excessive budget increases macroeconomic imbalances and thus exposes the economy to shocks. It further warned that in absence of measures to reduce the fiscal deficit, the future high-growth rates many forecast for India may not be achieved.

The rating agency pointed that July budget will indicate whether fiscal constraints on India's sovereign credit profile will ease over the coming years. Moody's presently has assigned a 'Baa3' rating to India, with a stable outlook.

In, report that outlines the reasons behind India's high fiscal deficits, provides a comparison between recent fiscal developments in India and in other similarly rated countries Moody's noted that other countries with low per capita income had avoided deficits as large as India's, suggesting that fiscal discipline could improve budget outcomes despite structural challenges.

Moody’s, blamed large population and low per capita income levels of the country as some of the reasons behind country’s higher fiscal deficit. It cited that low income levels was the factor for limiting the government's tax revenue base and at the same time driving socio-political pressure to increase government spending on subsidies and economic development.

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