‘Budget growth-oriented, poses fiscal challenges’

The Union Budget is growth-oriented and credit positive for many issuers, but budgetary provisions pose fiscal challenges, Moody’s Investors Service said.

“Focus [of the budget] on capital expenditure supports near-term growth, [but] poses challenges to longer-term fiscal consolidation,” Moody’s said.

While conservative assumptions left room for the government to respond to prevailing macroeconomic and pandemic risks over the next year, the path toward the government’s medium-term deficit target was undefined, the credit rating agency said. “Public spending to remain high for highways and railways; sovereign green bonds to mobilise funding for public projects to reduce carbon intensity. High infrastructure spending is positive for companies in this sector. The government also announced plans to issue green bonds, and increased incentives to support solar power,” it added.

Moody’s said the continued government spending on infrastructure projects would drive demand for key user industries, which was a credit positive.

“Conditions will remain supportive for most non-financial companies in fiscal 2023. The budget is positive for steel, cement, housing and solar photovoltaic (PV) module manufacturers, as well as downstream oil companies,” it said.

And the support for medium, small and micro enterprises was credit positive for banks and non-banking financial companies. “The expansion of the quantum of and period for securing government-guaranteed working loans for medium, small and micro enterprises (MSMEs) will support banks’ and nonbank financial companies’ (NBFCs) asset quality. Introduction of the digital rupee will further increase payment efficiency and financial inclusion,” it said.

It said the stock market listing of Life Insurance Corporation of India (LIC) was credit positive for its financial flexibility, governance and risk management. Economic expansion bolstered by government spending would stimulate demand for insurance cover, it said.

Moody’s said the Budget projected a narrowing in the Central Government deficit to 6.4% of GDP in fiscal 2022 from an estimated 6.9% in fiscal 2021. “The budget is characterised by a continued emphasis on rising capital expenditure to sustain growth momentum near term, as the economy continues to rebound from its pandemic trough. While conservative budget assumptions leave room for the government to respond to prevailing macroeconomic and pandemic risks over the next year, the path toward the government’s medium-term deficit target of 4.5% of GDP by fiscal 2025 remains undefined,” it said.

“Strong economic growth drives revenue outperformance in fiscal 2021, but pandemic shock deters fiscal consolidation

The government assumes that inflation-adjusted real GDP growth for fiscal 2021 will come in at 9.2% year-on-year, following growth of 13.6% in the first half,” it added.

“Mirroring the government’s conservative growth assumptions, the revised Budget estimates for fiscal 2021 show revenue receipts growing only 27.2%, which leaves some scope for further gains once the fiscal accounts are tallied at the end of March 2022. The Central Government recorded a 67.2% rise in revenue receipts over the first eight months of the fiscal year,” it said.

To accommodate this large increase, the government projects spending not related to capital expenditure to decline 1.8% in nominal terms and 1.5 percentage points as a share of GDP, reflecting the cessation of stimulus measures and the government’s view of the waning impact of price pressures.

In particular, it projects subsidies for fertilizer, food and fuel to decline 26.6% to ₹3.2 trillion (1.2% of GDP) from ₹4.3 trillion (1.9% of GDP) in fiscal 2021; on account of the government’s provision of free grain and pulses during the pandemic, the subsidy bill had previously ballooned to ₹7.1 trillion (3.6% of GDP) in fiscal 2020. Total Central Government expenditure is projected to decline to 15.3% of GDP, driving much of the narrowing of the deficit, it said.

Relative to the government’s assumption of 11.1% nominal GDP growth for fiscal 2022, its projection of a 6.0% rise in revenue receipts appears achievable, balancing buoyant corporate tax, income tax, and goods and sales tax (GST) receipts against declines in dividends and other non-tax revenue, it said.

“Consequently, the Budget projects revenue receipts to fall marginally to 8.6% of GDP from 9.0% in the revised estimates for fiscal 2021,” it said.

In contrast to previous Budgets in which disinvestment receipts were seen as a key source of funding, the projected contribution of capital receipts for fiscal 2022 has diminished greatly, to ₹650 billion (0.3% of GDP) from as high as ₹2.1 trillion (1.0% of GDP) in fiscal 2020, Moody’s said.

Prominent risks to the deficit target included the pandemic and inflation, the rating agency added.

“Both of these factors could spur additional spending to support the economy, although execution risks related to capital expenditure could dampen overall spending. The announced budget is consistent with our view of gradual fiscal consolidation and a continuing increase in government debt through the next year to around 91% of GDP,” it said.

It said the longer term spending pressures weighed on prospective improvements in India’s fiscal profile.

Moody’s said though Finance Minister Nirmala Sitharaman reiterated the government’s intention to meet its previously announced medium-term deficit target of 4.5% of GDP by fiscal 2025, she did not specify a road map to achieve that goal.

“Given the government’s stated ambitions to ramp up infrastructure development and promote inclusive growth, while meeting other commitments such as those related to climate change, expenditure pressures are likely to rise beyond the near-term retrenchment from pandemic-driven stimulus,” it said.

Despite the pull-back in spending from a peak in fiscal 2020, the Budget is still larger as a share of GDP than the average over the 10 years before the pandemic. Moreover, rising interest rates could push up already high debt servicing costs and worsen debt affordability, as measured by interest payments to revenue.

The government did not foreshadow any potentially significant measures to broaden the tax base, appearing to rely on healthy tax buoyancy and increasing tax compliance to drive revenue, at least through the forthcoming budget year.

Moreover, it may be challenging for the government to push through material revenue reform given general elections that need to be held by mid-2024, as well as various state elections before then. India’s fiscal strength is therefore unlikely to increase and will remain a key credit challenge compared with peers.

The government’s announcement that it would keep public infrastructure spending at an elevated level was credit positive for companies in this sector.

In fiscal 2021, the government spent 11% more than the Budget estimates on highways and 9% more on railways. The increase in public investment helps to address infrastructure constraints and support future private investment.

The total capital expenditure outlay by the government for fiscal 2022 is up by 24.5%, from a high base, from revised estimates for fiscal 2021, and is 35% more than the fiscal 2021 Budget estimates.

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