US-headquartered agency, Moody's Investors Service has said that it will closely watch India's fiscal consolidation plan in the upcoming Budget 2016-17. However, credit impact of fiscal policy will not be limited to forecasts of the fiscal road map, according to ratings agency, which said it will look for specific measures to expand revenue base and insulate government expenditure from economic shocks which will determine deficit outcomes in the medium term.
Moody's said that India's government finances will continue to compare poorly with those of its peers, in the absence of fiscal consolidation in the coming years. It further said that India's fiscal metrics will remain weaker than rating peers in the near term, because of the relatively high level of state and central government deficits and debt, even if budgetary consolidation continues. Moreover, it said that the fiscal consolidation process remains vulnerable to economic shocks, such as a fall in corporate profits or consumption growth, or an increase in subsidy costs, based on the trends in revenue and expenditure over the past five years.
Additionally it said that the fiscal improvements are likely to be limited in the near term, as in 2016-17, expenses could rise due to civil servant pay revisions and bank recapitalization costs. The current road map aims to reduce the Centre's deficit to 3.0% of GDP in 2018-19 rather than by 2017-18 under the original plan, from 4.1% in fiscal 2015. Over the past five years, the government's fiscal deficit has reduced, supporting the stabilisation of government debt ratios.