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  3. India should cut capital expenditure to meet 3.3% fiscal deficit target: Moody’s

India should cut capital expenditure to meet 3.3% fiscal deficit target: Moody’s

08 Jun 2018 Evaluate

Global rating agency Moody's Investors Service, in its latest report has said that India should cut its capital expenditure to avoid any slippage of its fiscal deficit target of 3.3% of gross domestic product (GDP) in the current fiscal (2018-19). However, it warned that any reduction in the excise duty on petroleum and diesel products in view of high crude oil prices, would exert negative pressure on the country’s sovereign credit profile. In the last year, it had upped India’s sovereign rating for the first time in over 13 years to ‘Baa2’ with a stable outlook, saying that growth prospects have improved with continued economic and institutional reforms.

The report also said that rating agency expects the government to meet its fiscal deficit target of 3.3% for 2018-19, based on its commitment to gradual fiscal consolidation and budget assumptions which appear achievable. But, it expressed some concern on the revenue side, saying that there is some downside risk to the government’s assumptions on the collections from the Goods and Services Tax (GST) and petroleum products excise duty. It added that the ongoing uncertainty around GST implementation and compliance, including the timely provision of input tax credit refunds and iterative changes to tax rates, could result in some potential revenue losses. However, it said that the initial setbacks on implementation appear to be fading and, over the medium term and expects that GST compliance to stabilise and revenues to become more predictable as the economy becomes more formalised.

As per the Moody's Indian affiliate, ICRA, the high crude oil price is likely to widen India's current account deficit (CAD) and points at slowing foreign portfolio investments as an area of concern. It added that if global oil prices remain at current levels, India’s CAD to widen to 2.4% of GDP in 2018-19 from 0.7% in 2016-17. However, it said that higher crude oil prices and a weaker Rupee would improve remittances and the services trade surplus in 2018-19, offsetting some of the adverse effects of rising commodity prices.

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