Rating agency Moody’s said on Thursday that it expects India to meet its fiscal deficit target of 3.3% of GDP for FY19, on the back of commitment to fiscal consolidation and attainable budgetary targets.
However, if global oil prices remain high and the government reduces duties on petroleum and diesel products, it will exert negative pressure on India's sovereign credit, Moody’s said in a statement.
In the last financial year, India had breached its fiscal deficit target of 3.2%. In the Budget for 2018-19, finance minister Arun Jaitley had revised the target to 3.5% of GDP in FY18, and 3.3% in FY19.
“Moody’s sees some downside risk to budgeted revenue and expenditure targets. It expects the government will cut back on planned capital expenditure, as in past years, if it is needed to offset any slippage from its fiscal targets,” said William Foster, a vice-president and senior credit officer at Moody’s.
He added that “on the revenue side, Moody’s sees some downside risk to the government’s assumptions on the collections from GST and petroleum products’ excise duty”.
Moody’s, which raised India’s credit rating a notch to Baa2 from Baa3 with a stable outlook last year, said that while there is uncertainty around GST implementation and compliance, the initial setbacks from the new indirect tax regime are fading. Moody’s expects GST compliance to stabilise and revenues to become more predictable as the economy becomes more formalised.
Moody’s Indian affiliate, ICRA, has raised concerns over slowing investments by foreign portfolio investors (FPIs), and said high crude prices are likely to widen India’s current account deficit.
Investments by FPIs, a barometer of confidence in the market, saw a net outflow of Rs 32,077 crore in January-May 2018, compared with inflows of Rs 1,18,251 crore in the corresponding period last year. While, the price of crude oil touched its highest level since November 2014, at $80 a barrel, in May this year.
“If global oil prices remain at current levels, ICRA expects India’s account deficit to widen to 2.4% of GDP in FY19 from 0.7% of GDP in FY17,” said Aditi Nayar, principal economist with ICRA.
She added that higher crude oil prices and a weak rupee will improve remittances and the services trade surplus in FY19, offsetting some of the adverse effects of rising commodity prices.
The country’s current forex reserves are equivalent to around 10 months of FY18 imports.
ICRA also expects GDP growth to rebound to 7.1% in FY19, reversing the dip recorded in FY18. “A normally distributed monsoon, increases in MSPs (minimum selling price) for crops, and staggered pay revisions by some state governments would support consumption growth in FY19,” Nayar said.
India’s quarterly GDP growth figures released last week showed it grew 7.7% in January-March, retaining the tag of the fastest-growing economy in the world.