The Narendra Modi government's election-year largesse to some sections of the society could strain India's ability to meet fiscal targets, according to US-based rating agency Moody's.
The country may fail to meet its fiscal deficit target of 3.3 percent by a percentage point and the interim budget that stand-in finance minister Piyush Goyal presented in parliament estimates 3.4 percent deficit for the next financial year also.
This will be a deviation from the stipulation in the Fiscal Responsibility and Budget Management (FRBM) Act under which the government has pegged the fiscal deficit for the next financial year at 3.4 percent of GDP, as against the original target of 3.1 percent.
The government will find it difficult to meet the fiscal deficit target of 3.4 percent in 2019-20 because of the higher spending and low revenue growth, Moody's Investors Service said.
India's debt is "stubbornly high" as a percentage of GDP, Gene Fang, Moody's Investors Service Sovereign Risk Group managing director said. The government needs to stick to the fiscal consolidation path to meet the targets and the election year sops have let the targets slip.
"While the government's growth assumptions appear reasonable, we think the government will continue to face challenges in meeting its fiscal targets, primarily due to structural increases in spending and difficulties in raising revenue further," a PTI report said quoting Fang.
Fang blamed increased spending on the proposed income support for small farmers that could force the country to miss the 3.4 percent fiscal deficit target for the year ending on March 2020.
Massive offer for farmers
With the government facing a general election around April-May, the Interim Budget for 2019-20, prepared by Finance Minister Arun Jaitley, has proposed a scheme under which about 12 crore farmers holding up to 2 hectares of land would get an annual payout of Rs 6,000. The budget also contains proposals to exempt middle-income earners of up to Rs 5 lakh from paying any income tax, releasing a large section of taxpayers from any liability.
Goyal said while present the budget that the government has earmarked Rs 20,000 crore in 2018-19 and Rs 75,000 crore in 2019-20 for providing income support to farmers.
Though India does not risk a rating downgrade from the current Baa2 'Stable' grade right now, continued failure to meet fiscal deficit targets could make the nation's claim for the current grade untenable, according to the Moody's official.
"India's government debt remains stubbornly high as a percent of GDP, but it's mostly domestically funded with a relatively long-dated maturity structure. India's economic growth also offers the potential to bring debt/GDP down, but only if the medium-term fiscal objectives of the FRBM are realized," the news agency quoted Fang as saying.
As per the FRBM Act, the debt-to-GDP ratio has to be brought down to 40 percent by 2024-25 from 50.1 percent in 2017-18.