P. Chidambaram's Budget 2014 meets deficit target, but India's fiscal position weak, warns Moody's

Feb 18 2014, 12:46 IST
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FM P. Chidambaram's Budget 2014 leaves all top decisions on next govt, says Moody's, but warns about 'weaknesses. (AP) FM P. Chidambaram's Budget 2014 leaves all top decisions on next govt, says Moody's, but warns about 'weaknesses. (AP)
SummaryFM P. Chidambaram's Budget 2014 put under scanner by Moody's.

Global rating agency Moody's today said FM P. Chidambaram's Interim Budget 2014 is in line with the policy assumptions that underpin the government's Baa3 rating with a stable outlook.

The global rating agency has, however, cautioned that India's fiscal position remains "weak".

"Moody's stable outlook on India's Baa3 sovereign rating incorporates the macro-economic risks posed by the government's high deficit and debt ratios as well as its recent efforts to control the fiscal deficit through ad hoc measures," it said in a statement.

The rating also incorporates the medium-term credit support provided by the government's favourable access to domestic savings for the purposes of financing its large borrowing requirements, the statement added.

The new government which would take office likely by May would determine the longer-term fiscal trends that could impact the government's credit profile, it said.

Global rating agencies like Moody's, S&P and Fitch have repeatedly threatened to lower India's credit rating and a downgrade would mean pushing the country's sovereign rating to junk status, making overseas borrowings by corporates costlier.

"Moody's notes that India's fiscal deficit ratios have declined over the last two years, but its general (central and state) government fiscal deficits remain higher than those of similarly rated peers," it said.

Moody's further said FM P. Chidambaram's higher-than- budgeted subsidy bill reveals the fiscal position's exposure to commodity prices and exchange-rate fluctuations.

In the Budget 2014, FM P. Chidambaram has said that the fiscal deficit for the current financial year would be contained at 4.6 per cent of GDP. The fiscal deficit, which is the gap between expenditure and revenue, was at 4.9 per cent of GDP in the previous financial year.

India met the target, despite lower-than-budgeted tax revenue growth, partly through non-tax revenues -- such as dividends from public-sector enterprises and fees from a telecom airwave auction -- and partly through a reduction in certain expenditures.

According to Moody's, while demonstrating a commitment to meeting its deficit targets, the Indian government's spending cuts are also likely to constrain GDP growth in the current year.

Thus, "meeting FM P. Chidambaram Budget 2014 proposed FY2014/15 deficit target of 4.1 per cent of GDP depends on the pace of GDP growth in India, commodity prices, and currency trends over the next fiscal year," Moody's said.

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