Small deficit slippage not to impact India's profile: Moody's

Moody’s has said India’s credit profile will be unaffected by a small slippage in fiscal deficit target as it expects the government to continue fiscal consolidation and target lower deficits every year despite headwinds from global slowdown.

Moody’s Investors Service Associate MD (Sovereign Risk Group) Atsi Sheth said a rise in corporate profits and bounce back in government revenues hold key to India meeting 3.5 per cent fiscal deficit target in 2016-17.

“We see fiscal consolidation as a process, not an event determined on the day of the budget announcement. While we are not focused on a shift in the fiscal deficit target by a few basis points, we do anticipate that the government will target lower fiscal deficits every year than in the previous year,” Sheth told PTI.

She was replying to a question whether a delay in the roadmap could impact India’s credit profile assessment.

The fiscal consolidation trend that has been underway for a few years now, Moody’s said “will continue despite headwinds from global growth”.

IMF had projected world economic growth to slow to 3.4 per cent in 2016, from earlier projected 3.6 per cent.

As per the fiscal consolidation path laid out by the government, deficit is to be brought down to 3.9 per cent of GDP in current fiscal and further to 3.5 per cent in 2016-17.  It was 4 per cent last fiscal.

Asked whether expenditure pressure could put pressure on 3.5 per cent target, Sheth said this will depend on whether revenues rise or not.

“Over the last year, corporate profits have been subdued.  And corporate income taxes are a good portion of government revenues. So if corporate profits improve, and government revenues bounce, that will support meeting the fiscal deficit target,” Sheth added.

Earlier this month, economists in their pre-budget meeting with Finance Minister Arun Jaitley had suggested that the government could consider deviating from fiscal deficit path and focus on public spending to promote growth.

Asked if the government should focus more on growth, Sheth said: “Whether additional fiscal spending is good or bad for India’s growth will depend on whether it is effectively directed towards creation of supply (or reducing supply constraints) without fuelling inflationary pressures.

This is something that will not be determined on February 29, but will only be clear over the rest of the year.”

Jaitley is scheduled to present the 2016-17 Budget on February 29, which the rating agencies would be watching closely for determining India’s credit profile.

Last year Moody’s upgraded India’s outlook to ‘positive’ from ‘stable’, but retained the credit rating at the at ‘Baa3’, just a notch above the junk grade. Moody’s had said it would consider a rating upgrade after 12-18 months depending upon improvement in macroeconomic parameters.