India Needs To Slash Long-term Spending To Improve Its Credit Profile: Moody’s

Even as the Indian economy is headed for recovery under the leadership of Prime Minister Narendra Modi, Moody’s Investors Service alerted that the country’s credit profile wouldn't improve unless the government drastically cuts down its long-term spending commitments. The agency rates India debt Baa3, its lowest investment grade, with a stable outlook.

According to Moody’s, "A decline in the deficit based on revenue buoyancy alone would be credit neutral at best, as the fiscal position would remain vulnerable to future cyclical downturns and external shocks."

"On the other hand, a significant reduction in long-term expenditure commitments, particularly those that are exposed to inflation, global or currency shocks, could lower this vulnerability," it said.

The agency further said the government finances were strained due to India’s high spending on fuel, food and fertilizer subsidies. This has also increased the economy's vulnerability to global oil-price and currency shocks.

For the fiscal year ending March, the government aims to narrow the deficit to 4.1% of gross domestic product from 4.5% a year earlier, on the back of higher tax collections as the economy recovers from its worst slowdown in years. But that level still is higher than in similarly-rated countries and it isn't clear if the Indian government will reduce long-term spending, as per a statement issued by Moody’s.

As per the government data, India's economy grew 5.7% on year in the quarter ended June, the strongest pace in more than two years, symbolising investors interest in Asia's third-largest economy.
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