Difficult for govt to maintain 3.4% fiscal deficit in FY'20: Moody's

Citizens with income lesser than Rs 5 lakh were to get full tax rebate which meant that they don’t have to pay taxes. Rebate under section 87A was hiked to Rs 12,500 from Rs 2,500. The amount under standard deduction was also hiked by Rs 10,000 to Rs 50,000 from Rs 40,000.

The government will find it difficult to meet the fiscal deficit target of 3.4 percent in 2019-20 on account on higher spending and low revenue growth, Moody's Investors Service said.

Observing that Indian government's debt is "stubbornly high" as a percentage of GDP, Moody's Investors Service Managing Director, Sovereign Risk Group, Gene Fang said it could be brought down only if the Centre sticks to the fiscal consolidation path.

Deviating from the path laid down in the Fiscal Responsibility and Budget Management (FRBM) Act, the government has pegged the fiscal deficit for the next financial year at 3.4 per cent of GDP, as against the original target of 3.1 per cent.

"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," Fang told PTI in an interview.

Fang said the 3.4 per cent fiscal deficit target for the year ending March 2020 is wider than expected, largely driven by increased spending to provide income support to small farmers and tax rebates ahead of the general elections in April-May this year.

The Interim Budget for 2019-20 doled out a scheme under which farmers holding up to 2 hectares of land would get an annual payout of Rs 6,000 -- a move intended to benefit about 12 crore farmers, among other measures for middle-class taxpayers.

However, there was a 0.1 per cent slip in the fiscal deficit estimate for the current financial year to 3.4 per cent.

While presenting the Budget, Finance Minister Piyush Goyal had said the government has provided Rs 20,000 crore in 2018-19 and Rs 75,000 crore in 2019-20 for providing income support to farmers, which has led to the slippage in the fiscal deficit.

Asked if India risks a rating downgrade following the breach in fiscal deficit target, Moody's said the country's 'Baa2' rating has a 'Stable' outlook, which indicates a balance of upside and downside risks.

"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 realised," Fang said.

As per the FRBM Act, debt-to-GDP ratio was to be brought down to 40 per cent by 2024-25 from 50.1 per cent in 2017-18.

In the 2018-19 Budget, the government had targeted to reduce its debt-to-GDP ratio to 48.8 per cent in 2018-19, 46.7 per cent in 2019-20 and 44.6 per cent in 2020-21, while fiscal deficit as a percentage of GDP was targeted to be reduced to 3.3 per cent, 3.1 per cent and 3 per cent, respectively during the same period.

US-based ratings agency Moody's had in 2017 upped India's rating to Baa2 from Baa3, changing outlook to 'stable' from 'positive', and said that reforms will help stabilise rising levels of debt.