Planned fiscal consolidation, which will bring the budget gap to 4.3% from 4.4% in the current year, will not change India’s credit profile, Christian de Guzman, senior vice president at Moody’s Ratings, told Reuters.
“Despite India’s lengthening track record of deficit consolidation or fiscal discipline, this deficit is still wider than what it was prior to COVID,” Guzman said. “We haven’t seen the fiscal metrics improve sufficiently enough to actually change the credit profile.”
Economic forecast
The economy is forecast to grow 7.4% in the current financial year, with inflation likely to be near 2%. The fiscal deficit for the year is set to be 4.4% of gross domestic product.
Last year, Moody’s Ratings kept India’s long-term local and foreign-currency sovereign ratings unchanged and maintained a “stable” outlook, saying the country’s economy remains strong and the government has reliable domestic funding for its budget deficits.
The Union Budget, presented on 1 February, placed a renewed focus on strengthening the country’s manufacturing sector, as the government looks to drive growth in Asia’s third-biggest economy while also navigating an increasingly volatile global environment.
The government has been aiming to raise manufacturing from the current level of under 20% of GDP to 25% to generate jobs for the millions entering the nation’s workforce each year.
Tax reforms impact
The budget comes shortly after New Delhi announced consumption and income tax cuts last year. Guzman said the government’s tax reforms will further weigh on revenue growth, with tax collections projected to decline by 0.2 percentage points next fiscal year compared to current estimates.
At the same time, large government borrowings have pushed bond yields close to one-year highs, limiting the government’s ability to ramp up spending.
Additionally, the government’s plan to borrow ₹17.2 trillion in the new fiscal year could crowd out private investments and contribute to a structurally high-interest environment, the executive said.
“For the next fiscal year, the ratio of interest payments to revenue is actually set to worsen and I think that largely reflects the lack of significant progress on debt reduction, but also a narrowing of the revenue base,” Guzman told the news agency in an interview.
