Moody’s: India’s FY2018 budget emphasizes fiscal prudence, continued gradual consolidation

Global Credit Research, New York, February 3, 2017


Moody’s Investors Service says that India’s budget for the new fiscal year ending March 2018 (FY2018) emphasizes fiscal prudence, continued gradual fiscal consolidation, and balanced growth, a credit positive for the sovereign.

Furthermore, the budget provides modest economic support for low-income households; benefits the infrastructure sector with a boost in public spending; and is generally supportive for business and the securitization sector with its lower tax rates for micro, and small- and medium-sized enterprises.

The merger of the previously separate Railway Budget and Union Budget and removal of the designation of “plan” and “non-plan” spending, following the dissolution of the Planning Commission should improve budget transparency and support the effectiveness of spending and revenue planning moving forward.

However, the budgeting of a lower amount of capital for infusions into public sector banks — although in line with its 2015 road map — is a credit negative for such entities.

Moody’s conclusions are contained in a just-released report on the document, “Budget Continues Gradual Fiscal Consolidation, Targeted Public Investment”. Finance Minister Arun Jaitley released India’s (Baa3 positive) budget on 1 February.

The Moody’s report examines the budget’s key policy announcements, and discusses their credit implications for the government, companies, financial institutions, project and infrastructure finance and structured finance.

Moody’s views the budget as consistent with the government’s commitment to gradual fiscal consolidation and balanced growth, and it has pledged to lower the fiscal deficit to 3.2% in FY2018 and further to 3.0% in FY2019.

In this context, Moody’s expects the government to achieve its targets, based on achievable budget assumptions and demonstrated commitment to fiscal prudence, but also note that spending commitments are significant and structural hurdles to rapid increases in revenue collection are apparent.

The deficit targets imply gradual medium-term fiscal consolidation, driven largely by higher nominal GDP growth and bolstered by improvements in revenue collection. High and sustainable nominal GDP growth will depend on the recovery of the private investment cycle, which will be in turn contingent upon the successful implementation of current and future reforms.

However, state deficits — which have risen steadily from around 2% of GDP in FY2012 to about 3% today — could widen, resulting in a higher overall general government deficit than expected.

In addition, uncertainty surrounding the final impact of demonetization and the pending Goods and Services Tax (GST) on state revenues, combined with increases in total expenditure for government employees, point to a risk of fiscal slippage.

Regarding the public sector banks, the government has budgeted for INR100 billion ($1.5 billion) of capital infusions in FY2018, below the INR250 billion injected in the previous year. At a time when capital levels remain precarious and market access to external capital difficult, this is a credit negative for public sector banks. The lack of a clear resolution mechanism is also credit negative for the sovereign.

The planned increase in public infrastructure spending is credit positive for companies in this sector. It could also help to address infrastructure constraints, which have likely hampered growth and contributed to economic volatility, and support future private investment.

Moreover, the budget is positive overall for business. It has halved income tax rates for lower-income individuals and lowered the tax rate for micro, and small- and medium-sized enterprises to 25% from 30%. The changes are also credit positive for Indian asset-backed securities, as they will help to boost collection rates and lower delinquency levels.

The government has also allocated INR250 billion for fuel subsidies in FY2018, which seems sufficient based on current oil prices. This is credit positive for state-owned oil and gas companies, as it implies that the government will not ask them to share the burden. The authorities are also mulling merging state-owned oil companies, which would ultimately be an overall positive.


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