Challenges Remain For Indian Government’s Fiscal Deficit Plan: Moody’s

Challenges Remain For Indian Government’s Fiscal Deficit Plan: Moody’s
Challenges Remain For Indian Government’s Fiscal Deficit Plan: Moody’s

New Delhi, February 4: Indian government would face challenges in achieving its fiscal deficit target for the year ending March 2021, amid persistent structural and cyclical headwinds to growth, analysed Moody’s Investors Service.

Budget 2020-21 called for a narrowing of the deficit to 3.5 per cent of GDP for fiscal 2020-21 from 3.8 per cent in fiscal 2019-20.

“While the latest budget targets a narrower deficit, prolonged weakness in nominal GDP growth in  India combined with lower revenue collections, has dampened the outlook for fiscal consolidation, raising the risk that the debt burden may not stabilise,” said Gene Fang, a Moody’s Associate Managing Director.

“The debt burden is sensitive to nominal GDP growth, which we expect will remain lower on average than in the past. In light of India’s weak fiscal health compared with its rating peers, any slippage in debt reduction will be credit negative,” added Fang.

Meanwhile, the five-fold increase in deposit insurance to Rs 5 lakh ($6,986) per deposit holder is credit positive for banks, as it will raise depositor confidence and bank funding, particularly across small and medium-sized private sector and cooperative banks.

It analysed that the rise in public infrastructure spending and tax exemptions for sovereign wealth funds are also credit positive for infrastructure companies, as public capital outlays on highways and railways would increase modestly. Additionally, the 100 per cent tax exemption on income and capital gains for infrastructure investment made by sovereign wealth funds will attract more long-term foreign capital.

In securitisation, quicker debt recovery and additional interest deduction on home loans are credit positive for Indian transactions. Reducing the loan size eligible for debt recovery will expedite the recovery of loans by non-bank financial institutions. Additional interest deduction on affordable home loans will also raise borrower debt servicing ability and support residential mortgage-backed securities.

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