Warning against fiscal risks like high interest payment and subsidy spending, global rating firm Standard & Poor’s has said India’s hard-won fiscal improvements may unwind because of a “financial or commodity shock”.
The large interest payments and subsidy spending in budgetary expenditure are signs of fiscal risks because they leave little for the central government to spend at its discretion, after necessary social services expenditure, S&P said in a report on India.
Without further fiscal reforms, the Indian government may find it difficult to sustain the increase in public investment spending, according to S&P. “Although India’s budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of a financial or commodity shock,” said Standard & Poor’s credit analyst Kim Eng Tan. “Subsidy spending is one key source of weakness, despite fuel-subsidy reforms in 2014. Another constraint is the heavy government debt.”
Moody’s, another global ratings agency, raised India’s rating outlook to “positive” from “stable” last week, but retained the ‘Baa3’ rating. Moody’s was the first to give the country a positive outlook after downgrading it over a sagging economy.
“The central government’s willingness to cut spending to rein in the budget deficit indicates the high priority of fiscal prudence on its agenda,” said Tan of S&P. “From an institutional and governance point of view, this supports the sovereign credit rating on India — BBB-/Stable/A-3. However, structural fiscal weaknesses continue to be vulnerabilities of Indian sovereign creditworthiness,” S&P said.
The S&P report notes that the central government budget deficit in India has fallen in recent years, relative to GDP. However, the latest-year deficit reduction didn’t come easy. Disappointing tax collections, especially services tax collection, dragged estimated total revenue for the fiscal year ended March 2015 6.3 per cent below the central government’s initial budget projection. The government had to cut spending by a similar proportion to prevent the budget shortfall from widening. Since subsidy bill came in above expectations, the government made significant cuts to capital investments to bring spending down.
Further constraining public infrastructure financing is the government’s relatively small share of GDP . This is why public investment in India has been persistently lower than that of some other developing countries. The centre appears intent to change this. It has bumped up capital spending this fiscal to March 2016 by more than 25 per cent, which is significantly higher than the average 5.4 per cent growth since fiscal 2011-2012, S&P said.
According to Standard & Poor’s, an unexpectedly sharp increase in interest rates could still raise India’s budgetary interest payments. Similarly, if food and fertilizer prices are markedly different from assumed levels, the subsidy bill could be larger than expected.