High government debt level limits room to cut fiscal deficit quickly: Moody’s

27 Jan 2017 Evaluate

Global ratings agency, Moody's Investors Service (Moody’s) has said that its positive outlook on India's Baa3 credit rating reflects their expectations of continued policy reforms which will allow balanced growth to support a sustainable reduction in the government's debt burden, even as it feels that the high debt level limits room to cut fiscal deficit quickly. It also cautioned that India's debt-to-GDP ratio at 68.6 percent is high compared to peers and the economy will return to the previous trend by mid-2017 after temporary effects of demonetisation fade away.

The agency said that India's general government debt-to-GDP ratio, at 68.6 percent, is high relative to peers. Therefore, room to reduce the deficit quickly is limited as wages and salaries account for about 50 percent of total expenditure with a large, once-in-10-years increase in central government compensation just implemented. As a result, fiscal policy decisions will need to be carefully calibrated, moving forward".

Moody’s V-P Sovereign Risk Group William Foster said that persistent sizeable deficits imply that any reduction in India's debt burden will largely rely on robust nominal Gross Domestic Product (GDP) growth, which, in turn, is linked to a sustainable recovery in private investment. He also said that government capital expenditure that crowds in such private investment through infrastructure investment could support such growth. Foster on impact of demonetization said that in the medium term, it will strengthen India's institutional framework by reducing tax avoidance and corruption. He added that Demonetisation should also result in efficiency gains through greater formalisation of economic and financial activity, which would help broaden the tax base, enhance tax revenues and expand usage of the financial system.

The government aims to lower fiscal deficit to 3.5 percent of GDP in the present financial year, from 3.9 percent earlier. The 2017-18 budget, which is due on February 1, will outline the fiscal deficit target.

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