India is unlikely to achieve its ambitious target to narrow the deficit to 4.5% of GDP by financial year 2025-26 in the absence of more material gains in revenue, according to Moody's Investors Service.
The Union Budget 2023-24 projects a narrowing in the central government fiscal deficit to 5.9% in FY24 from 6.4% in FY23 and as wide as 9.2% in FY21.
Moody's, however, expects continued gradual fiscal consolidation to help stabilise the debt burden. The Budget balances the government's commitment to longer-term fiscal sustainability against its more immediate priority of supporting the economy amid high inflation, weak global demand, and ahead of general elections due by May 2024, Moody's says in a report.
Although changes to the tax regime will forego some income, the budget predicts largely buoyant revenue on robust nominal GDP growth and gains from stronger tax administration, the ratings agency says.
This should avoid a further deterioration in India's debt affordability as debt servicing costs increase on rising interest rates, it adds.
Notwithstanding some improvement in India's fiscal position in recent years, a high debt burden and weak debt affordability remain key constraints that offset the country's fundamental strengths, including high growth potential and deep domestic capital markets, Moody's cautions.
"We expect India's general government debt burden to have peaked at around 90% of GDP in fiscal 2020, up from pre-pandemic levels of about 70% in fiscal 2018. In fiscal 2022, we forecast debt to have fallen to about 85% of GDP, but that remains significantly higher than the Baa-rated peer median of around 55%," the report says.
"The government has largely met its fiscal objectives over the past two years, assuaging concerns on fiscal policy effectiveness given a history of slippage from deficit targets. The budget also provided some reassurance on state finances, capping state deficits at 3% of gross state domestic product, with 0.5 percentage point of that tied to power-sector reform," it says, adding that trends in nominal GDP growth will be key in determining whether the debt burden can materially decline over the medium term.
Budget 2023 is credit positive for renewable energy companies, cement and steel producers, oil marketing companies and automakers in particular, according to Moody's. Continued high allocations toward strengthening the nation's infrastructure are also credit positive for rated cement producer UltraTech Cement and steelmakers Tata Steel and JSW Steel, the ratings firm notes.
The extension of the concessional custom duty of 5% on battery cells until fiscal 2023 will benefit electric vehicle (EV) manufacturers such as Tata Motors, says Moody's, adding that a scrappage policy for old vehicles will also help the company's commercial and passenger vehicle businesses. While Tata Motors' three models have helped it garner a 90% share in India’s lowly penetrated EV market, the company plans to expand its offering to 10 models by fiscal 2025.