Moody's Investors Service, which rates India's sovereign at Baa2 stable, expects the government to meet its fiscal deficit target of 3.3% of GDP for the fiscal year ending 31 March 2019, based on its commitment to gradual fiscal consolidation and budget assumptions which appear achievable.
Moody's Indian affiliate, ICRA, says that high global crude oil prices are likely to widen India's current account deficit and points to slowing foreign portfolio investments as an area of concern.
"Although Moody's sees some downside risk to budgeted revenue and expenditure targets, it expects that the government would cut back on planned capital expenditure, as has occurred in past years, if it is needed to offset any slippage from its fiscal targets," says William Foster, a Moody's Vice President and Senior Credit Officer.
"On the revenue side, Moody's sees some downside risk to the government's assumptions on the collections from the Goods and Services Tax (GST) and petroleum products excise duty," says Foster.
Ongoing uncertainty around GST implementation and compliance, including the timely provision of input tax credit refunds and iterative changes to tax rates, could result in some potential revenue losses. However, the initial setbacks on implementation appear to be fading and, over the medium term, Moody's expects GST compliance to stabilize and revenues to become more predictable as the economy becomes more formalized.
Meanwhile, if global oil prices remain high, Moody's says the government could intervene by reducing the excise duty on petroleum and diesel products, which would exert negative pressure on India's sovereign credit profile. Excise duties make up over 20% of retail selling prices and were started in 2016 when oil prices fell.
"On the expenditure side, the budgetary cost of the new Minimum Support Price (MSP) formula for agricultural products, at cost plus 50%, could put additional pressure on expenditure," says Moody's Foster.
"Higher oil prices will have a limited impact on subsidy expenditures by the government, as petrol and diesel prices have been deregulated, leaving only liquefied petroleum gas (LPG) and kerosene subject to subsidies," says Foster.
Moody's assumes that subsidies on energy products will not change in the near term. However, any unexpected pre-election-related spending could exert pressure on budgeted expenditure targets.
Over the medium term, Moody's expects the government's formal adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act to enhance India's fiscal policy framework and strengthen policy credibility. Use of an official debt rule to bring down the central government debt-to-GDP ratio to 40% by 2025 (from about 50% today) along with a fiscal deficit target roadmap as the key operational parameter will serve as key pillars to India's medium-term fiscal framework.
Together with the new fiscal rules for Indian states set by the 15th Finance Commission and sustained high nominal GDP growth, Moody's expects India's general government debt-to-GDP ratio to gradually decline toward 60% by 2025 from nearly 69% today.
"If global oil prices remain at current levels, ICRA expects India's current account deficit to widen to 2.4% of GDP in FY2019 from 0.7% of GDP in FY2017," says Aditi Nayar, Principal Economist with ICRA.
"However, higher crude oil prices and a weaker Rupee would improve remittances and the services trade surplus in FY2019, offsetting some of the adverse effects of rising commodity prices," says Nayar.
The substantial rise in India's foreign exchange reserves has been accompanied by an increase in India's merchandise import bill, following the uptick in commodity prices. The current level of reserves is equivalent to around 10 months of FY2018 imports, which ICRA says is significantly healthier than the around seven months available amid the taper tantrum in 2013.
Nevertheless, an expected slowdown in foreign institutional investment has emerged as a concern, even though foreign direct investment (FDI), external commercial borrowings, and deposit inflows from non-resident Indians (NRIs) are likely to be healthy in FY2019.
ICRA expects the average CPI inflation to rebound by 100 bps to 4.6% in FY2019. If the average price of the Indian crude oil basket climbs to USD80 per barrel in FY2019, and higher prices are completely passed through to domestic fuel prices, ICRA expects average CPI inflation to increase to around 4.9% in FY2019, unless central and state taxes are reduced, which could prompt rate hikes by the Monetary Policy Committee.
ICRA expects GDP growth to rebound to 7.1% in FY2019, reversing the dip recorded in FY2018. A normally distributed monsoon, increases in MSPs for various crops, and staggered pay revisions by some state governments would support consumption growth in FY2019.
While this would bolster capacity utilisation in various sectors, ICRA does not expect a broad-based capacity addition by the private sector to emerge until H2 FY2019. Completion of the resolution process of cases admitted to the National Company Law Tribunal (NCLT) would improve utilisation of existing capacity and promote consolidation in some sectors. ICRA expects the depreciation of the Rupee to support export growth although the risk of trade tensions persists.
Moreover, higher average prices of crude oil and various fuels, as well as the risks posed by revised MSPs, could result in an increase in interest rates over the course of the year, believes ICRA. Such factors are likely to dampen the purchasing power of consumers as well as earnings across various sectors, which could emerge as a downside risk to the rebound in economic growth expected in FY2019.
