We had not expected 3.4% fiscal deficit target in FY20, The original target had been 3.1%. In FY21, the target is 3%. It is going to be very challenging to go to 3% from 3.4%, William Foster, VP/Senior Credit Officer, Moody’s Investors Service, tells ET Now.
The government has pegged FY20 fiscal deficit at 3.4%. Given this is an election year, do you think that the budget has been populist in nature or a rational one? What have been the key hits and misses?
The key focus for us really is the extent to which the budget maintains the fiscal consolidation roadmap that the government had set out last year, particularly with regards the FRBM targets. We had expected a 3.4% fiscal deficit target or realisation this year which is in line with our expectations, a modest slippage from 3.3% target.
But next year, the 3.4% pause was something we had not anticipated. We had expected a continued reduction in the fiscal deficits along the terms of the roadmap. The original target had been 3.1%. The question from our perspective really is what was behind that veering from the target, ultimately what the composition of spending will be and to what extent that will support growth of the economy.
That is really what we are focussed on right now. Obviously, their focus has a new programme to support direct income transfers to farmers at the lower end of the income spectrum as well as some tax cuts for the middle class on the revenue side. Those two things, added together, ultimately result in slippage from FY20 targets.
That continued slippage is credit negative for sovereign. However, the government is committed to reach a fiscal deficit of 3% for FY21. Given the backdrop of reforms taken, do you think the fiscal targets are realistic?
The government noted that they intend to pursue the target of 3% in fiscal 21, so that the fiscal consolidation or the glide path did not change. However, the annual path to get there did change. We see that it is going to be challenging going from 3.4% to 3% from 2020 to 2021. ,Ultimately it is going to require greater progress on the revenue side through higher collections as well as enhanced expenditure efficiency. Right now, it is going to depend on the implementation of the new programmes that they have announced and ultimately growth.
Second part of your questions is on growth, we do expect this year’s budget to be supportive of growth. Ultimately, the income transfers and the tax cuts will support consumption and that should be supportive of growth. Our expectation for growth this fiscal year is 7.2% and 7.4% for next year. These would be supportive of that.
What is your view on India sovereign rating post the interim budget and the key factors that you would look out for to maintain your stance on India?
Our views have not changed on the ratings side. Ultimately, the credit profile for India has not been materially altered in any meaningful way from the budget. However, the key challenge for India’s credit profile is fiscal strength and to improve on that front there needs to be a gradual reduction of deficits and ultimately the reduction of debt to GDP ratio. That is how we look at things, not just the central government which this budget focus on but in aggregate the consolidated general governments which includes the states.
Obviously the states have been deteriorating and slipping as well as the centre more recently. Adding those up, India’s debt to GDP ratio today is close to 70% and the challenge moving forward is going to be ultimately to bring that down closer to the median.
India sits in the AA space on our credit rating spectrum, which is actually below 50%. There is a significant gap in India’s debt to GDP burden and India’s credit profile has to improve to support higher rating in the future. You need to see continued gradual improvement on that front and this budget does not really give us clarity as to how that will be achieved based on the fiscal slippage.
What is the view on the assumptions on the revenue front — both tax and divestment — and the overall quality of fiscal consolidation?
On the revenue side, there was not necessarily any positive changes that we would expect to increase revenue moving forward, unlike last year’s budget which focussed very much on indirect taxes and a big increase in GST collection from 2.6% in GDP to 4%, which at that time we considered ambitious.
Obviously, that is playing out this year with a shortfall leading to several changes based on changes to GST rates as well as exemption limits. Next year, when you look at the continued challenges around GST implementation and the cuts to rates and changes to exemptions, it is going to be more difficult to collect higher GSTs because you are effectively extending the tax base on that front. Plus you have some tax cuts.