Moody's says India's Budget 2018 balances growth, fiscal consolidation; 5 key takeaways

International credit rating agency Moody's in its latest report on India's Union Budget 2018, which was announced on February 1, has said it would benefit corporate, infrastructure and insurance sectors. Overall, it says, the Budget presented by Finance Minister Arun Jaitley strikes a balance between "fiscal prudence and growth". In the report 'Cross-Sector -- India: Fiscal 2019 budget strikes balance between fiscal prudence and growth', the Moody's expects the government will meet next year's deficit target but some "ambitious revenue targets and uncertainty about some spending items" could hurt the fiscal consolidation. Moody's Investors Service in November 2017 had upgraded the government's local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive after a gap of 13 years after taking note of the structural reforms carried out by the government.

NO MATERIAL IMPACT OF FISCAL SLIPPAGE: Moody's Investors Service says a slight slippage in the budget deficit targets has "no material impact on the country's overall fiscal strength and is in line with Moody's expectations". "The revised fiscal consolidation path is modestly shallower than the previous roadmap, but does not fundamentally alter India's overall fiscal strength," says William Foster, a Moody's Vice President. "Furthermore, the medium-term target to reduce the central government debt-to-GDP ratio to 40 per cent is supportive of the sovereign credit profile," adds Foster. As per the earlier projections, India's fiscal deficit was estimated at 3.0 per cent for 2019 and 3.2 per cent for the 2018 fiscal, while the government recently revised its projection at 3.3 per cent of the GDP (Gross Domestic Product) for 2019 and 3.5 per cent for 2018.

PSU CAPITAL INFUSION TO INVITE INVESTMENT: The report seems to be taking note of Finance Minister Arun Jaitley's bank recapitalisation plan. "The budgeted capital infusion for the public sector banks is in line with the recapitalisation roadmap detailed in October 2017," says Moody's Vice President Joy Rankothge. Finance Minister Arun Jaitley on January 25 said the government has moved proposal to infuse additional grant of Rs 88,139 crore - Rs 80,000 crore through Recap Bonds and Rs 8,139 crore as budgetary support - for 2018 under the public sector banks recapitalisation plan. Moody's says the recent government efforts to address balance sheet issues in public sector banks, through recapitalisation and resolution of problem loans, should contribute to stronger investment.

MSP HIKE, GST TARGET MAY CAUSE SLIPPAGE: The agency reports the government's decision to increase MSP and the government's target on the Goods and Services Tax (GST) may cause further slippage in fiscal target. "The projected expenditure restraint and strong revenue growth are likely to be broadly achieved, although some measures such as the rule guiding increases in Minimum Support Prices (MSPs) and ambitious GST revenue targets could result in some further slippage," remarks Foster. The Union Budget for 2018-19 announced to fix minimum support prices (MSP) on kharif crops to 50 per cent on production costs. The GST revenue collection for December, received till January 24, was Rs 86,706 crore. The GST Council on January 19 cut the tax rate on 29 goods and 54 categories of services, which may cause decline in revenue this month.

NOMINAL GDP IN LINE OF MOODY'S FORECAST: Moody's report says the formal adoption -- as stated by Finance Minister Jaitley when he announced the Budget 2018 -- of key recommendations, including the objective to bring down the central government debt-to-GDP ratio to 40 per cent (from about 50 per cent today) and use of the fiscal deficit target as the government's key operational parameter, by the Fiscal Responsibility and Budget Management Committee (FRBM) is "credit positive". The Budget assumes 11.5 per cent nominal GDP growth for fiscal 2019, which is in line with Moody's forecast, says the report, adding that sustained high nominal GDP growth will depend on the recovery of the private investment cycle, which will in turn be contingent upon the successful implementation of current and future reforms.

BOOST TO CORPORATE, INSURANCE SECTORS: The report hails the Budget announcements on increasing rural spending, lowering corporate tax from 30 per cent to 25 per cent, and relaxing restrictions on the ability of financial intermediaries to invest in lower rated corporate bonds are credit positive. "The infrastructure sector will benefit from a boost in spending and the government's continued focus on public investment will also help galvanise India's upturn in capital spending," says the report. The insurance market will benefit from the launch of a national health scheme and the merger, as well as listing, of three state-owned insurers. The insurance, and in particular non-life market, is set to benefit from the growth prospects provided by the widening of universal health insurance cover, says the agency.