Budget provides broad support; fiscal consolidation prospects still weak: Moody’s

Clipped from: https://www.businesstoday.in/current/economy-politics/budget-provides-broad-support-fiscal-consolidation-prospects-still-weak-moodys/story/430212.html

Moody’s expects India’s nominal GDP growth to rise close to 17 per cent in fiscal 2021, higher than 14.4 per cent pegged in the Union Budget 2021 

India’s fiscal deficit projections are larger than expected, says Moody’s

The Union Budget 2021 focuses on higher capital expenditure, financial sector reforms and asset sales, which will help to stimulate growth and supply broad-based credit support, says global rating agency Moody’s. The agency, however, cautioned that the government’s weak fiscal position is likely to remain a key credit challenge in medium term.

The agency expects India’s nominal GDP growth to rise close to 17 per cent in fiscal 2021, higher than 14.4 per cent pegged in the Union Budget 2021.   

Finance Minister Nirmala Sitharaman in her Budget speech said the fiscal deficit will touch 9.5 per cent of GDP in the current fiscal, much higher than the budgeted estimate of 3.5 per cent.  The government has also projected a deficit of 6.5 per cent for the next fiscal, adding that it would reach 4.5 per cent only by FY26.

“While the deficit projections are larger than expected, they reflect both credible budgetary assumptions and greater transparency,” it said.

Also Read: FDI hike in insurance, LIC IPO, privatisation of state-run insurers credit positive: Moody’s

“The latest budget calls for a narrowing of the central government’s fiscal deficit to 6.8 per cent of GDP in fiscal 2021 from an estimated 9.5 per cent of GDP in fiscal 2020 – the latter marking a sharp increase from the 3.5 per cent of GDP that the government targeted before the coronavirus shock. We previously expected a smaller central government deficit target of about 5.5 per cent of GDP for fiscal 2021, down from around 7.5 per cent of GDP in fiscal 2020,” Moody’s said.

The widening of the fiscal deficit in fiscal 2020 was driven almost entirely by expenditure to support Indian households and the economy from the COVID-19 pandemic crisis. The government increased total spending to about 17.7 per cent of GDP in fiscal 2020 from 13.2 per cent in fiscal 2019. The agency expects budget expenditure to decline to 15.6 per cent of GDP in fiscal 2021, which should be achievable as the economy gains strength and temporary coronavirus relief measures unwind. Of overall spending, subsidy spending increased the most, rising to 3.1 per cent of GDP in fiscal 2020 compared with 1.1 per cent in fiscal 2019. This was driven mainly by a sharp rise in food subsidy spending to 2.2 per cent of GDP from only 0.5 per cent in fiscal 2019.

Also Read: Large fiscal deficit, consolidation to pressure India’s ratings: Fitch

On Budget’s projection of capital expenditure, the agency said that it is accelerating further to 2.5 per cent of GDP, reflecting year-on-year growth of around 26 per cent. This would be the highest capital spending ratio since fiscal 2007 and would contribute to potential GDP growth over the medium term through the development of physical infrastructure, Moody’s said.

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