Room to cut fiscal deficit to 3% in FY 2018 is limited: Moody's

The Dollar Business Bureau

The government is expected to achieve its target to reduce fiscal deficit to 3.5% of GDP (Gross Domestic Product) in the current financial year but higher spending on infrastructure will limit the room to cut it further to 3% in 2017-18, credit rating agency Moody's Investors Service said on Monday.

The rating agency expects the Indian government to renew its commitment to enhance capital spending and address the impact of demonetisation in the Union Budget to be presented on February 1, 2017. 

“On the fiscal front, the government will likely remain committed to achieving its fiscal deficit target of 3.5% of GDP for the fiscal year ending March 2017. However, room to reduce the deficit further to the target of 3% of GDP in the following year will be limited, due to the need for increased infrastructure spending and higher government salaries,” Moody's said in a statement. 

In an environment of sluggish global trade and with the countries worldwide facing rising risk of protectionism, the large domestic markets of India provide comparatively a competitive advantage as compared to the small and more trade-reliant countries. 

The implementation of the proposed GST and other steps aimed to augment income declarations and collection of tax will help in widening the tax base of India and increase revenues, it said.

However, such boost will only materialise with time as the magnitude is uncertain at this point of time. 

With enhanced spending on infrastructure and higher spending due to pay commission suggestions, the general government deficit will continue to be sizable and any cut in country’s government debt burden will mainly rely on strong growth in nominal GDP, Moody's said.

“Moody's expects that the debt-to-GDP ratio of India will remain at the current levels (68.6% in 2015) before declining gradually, as growth in nominal GDP is constant and measures such as expenditure efficiency-enhancing and revenue-broadening, take effect,” it said.