New Delhi, Nov 19: Lower taxes and higher public expenditure could widen budget deficit in 2017-18, but steps taken by the government to broaden the tax base and improve spending efficiency would help in narrowing it going forward, US-based rating agency Moody’s said.
In an interview, Moody’s Investors Service V-P (Sovereign Risk Group) William Foster said the agency believes that the government’s commitment to fiscal consolidation remains and sustained growth would help it reduce debt burden.
Moody’s had last week raised India’s sovereign rating for the first time in over 13 years, saying growth prospects have improved with continued progress on economic and institutional reforms. The rating was upgraded to Baa2 from Baa3 and rating outlook was changed to stable from positive.
Foster said the upgrade reflects the expectation that continued progress on economic and institutional reforms will enhance India’s high growth potential and its large and stable financing base for government debt and will likely contribute to a gradual decline in the general government debt burden over the medium term.
India’s debt-to-GDP ratio stood at 68.6 per cent and a government-appointed panel has recommended lowering it to 60 per cent by 2023.
“We forecast the general government budget deficit at 6.5 per cent of GDP this fiscal year, similar to the last two fiscal years. Lower government revenues than planned in the Budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted.
“However, over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a gradual narrowing of the deficit. Together with robust and sustained nominal GDP growth, this would be conducive to a gradual decline in the government debt burden,” Foster said.
Foster, however, added that a material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating.
General budget deficit includes expenditure incurred and revenue earned by both the Centre and states.
“The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply,” he added.
The central government, in Budget 2017-18, had set a target of 3.2 per cent for fiscal deficit, which is the difference between the Centre’s revenue and expenditure, for this fiscal.