India to meet fiscal deficit target of 3.3%; oil prices may widen current account deficit in FY19: Moody's

Moody’s Investors Service expects India to meet its fiscal deficit target of 3.3 percent of GDP for the financial year ending March 2019, the rating agency said in a statement on June 7.

The government breached its fiscal deficit target of 3.2 percent of GDP, but managed to meet its revised target of 3.5 percent for FY18.

For FY19, the target has been set at 3.3 percent, suggesting moderate consolidation over last year. Moody’s believes the budget assumptions are achievable, but acknowledges that the government may need to cut planned expenditure.

"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," said William Foster, Vice President and Senior Credit Officer at Moody’s.

Forex and GST

However, he added that the economy has adequate forex reserves which are enough to cover up to 10 months of imports based on the FY18 import bill.

In November last year, Moody’s upgraded India’s sovereign rating for the first time in 14 years. The rating upgrade was based on a number of reforms including the implementation of GST, the bankruptcy code and the new monetary policy framework.

"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," Foster said.

As initial setbacks on implementation of the GST appear to be fading and, over the medium term, the ratings agency expects GST compliance to stabilise and revenues to become more predictable as the economy becomes more formalised.

It also believes that credit quality of Indian non-financial corporates (NFC) will remain supported by a robust growth outlook for the domestic economy and a benign outlook for global economic growth.

Moody's Indian affiliate, ICRA Limited, says the non-infra corporate sector has seen some revival in growth and margin expansion over last 2-3 quarters.

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 percent by 2025 from nearly 69 percent today.

Current account deficit

Aditi Nayar, Principal Economist with ICRA further said, "If global oil prices remain at current levels, ICRA expects India's current account deficit to widen to 2.4 percent of GDP in FY2019 from 0.7 percent of GDP in FY2017.”

"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," Nayar added.

Moreover, ICRA believes that higher average prices of crude oil and various fuels, as well as the risks posed by revised MSPs (minimum support prices), could result in an increase in interest rates over the course of the year.

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.