Budget lacks specifics to address macroeconomic imbalances

Tags: News
Global credit agencies including Moody’s said on Monday that finance minister Arun Jaitley’s budget has certainly unveiled steps for faster economic growth but regretted that specific revenue and expenditure measures were lacking to shrink fiscal deficit to 4.1 per cent of GDP this financial year.

“Unless the budget is followed by a more specific implementation plan, as well as additional measures to address macroeconomic imbalances, its credit effect will be modest,” said Moody’s in a statement.

Another global rating agency Standard & Poor’s too had similar view and said that the budget would not have an impact on India’s sovereign ratings until it could see how the measures will be implemented, especially regarding meeting the fiscal deficit target.

S&P told a teleconference with reporters that the budget is favourable to credit fundamentals but it remains to be seen how and to what extent will the various measures proposed be implemented and in particular how the deficit target will be met.

Fitch Ratings over the weekend called Jaitley’s budget as “constructive” for its sovereign ratings but said implementation will be the “key”. It said it was unsure how the fiscal deficit target of 4.1 per cent could be achieved without revenue increases or spending cuts.

“A smaller fiscal deficit would be credit positive since India's weakening public finances have fuelled inflation, raised domestic interest rates and heightened macroeconomic imbalances, constraining sovereign credit quality," Moody’s said.

"Lack of detail makes it difficult to assess the feasibility and sustainability of the fiscal consolidation effort," Moody’s added.

Fitch also felt that India’s infrastructure sector will get a huge boost from the several steps announced in budget, especially those on easing funding for infrastructure in which $1 trillion is to be spend in the next five years.

The new Indian government… reasserted one of its core economic priorities to address the country’s infrastructure deficit… infrastructure to get multi-year boost,” it said in a statement on Monday.

Fitch singled out the move to allow banks to raise long-term bonds for lending to longer gestation infrastructure projects and making it more attractive by giving concessions on mandatory bond holdings and cash reserve requirements, as one of the biggest positives.

On public sector banks recapitalisation, Moody’s however saw limited credit effect because the measured do not address the more pressing issue of bank’s capital weakness.

Moody’s also felt that the new government’s budget offered no bold structural reforms in the power sector to address the problems related to the cost pass-through of imported fuels, the shortage of domestic gas for gas fired power plants, as well as the long-term financial health of state electricity boards. These are policy issues that will require focus on dedication, and the new government has only been in office for six weeks.

While Moody’s has assigned Baa3 rating on India with stable outlook, Fitch holds BBB-minus rating with a stable outlook and S&P too has BBB-minus rating.


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