Conservative Budget Estimates Leave Room For Pandemic Response, Macroeconomic Risks: Moody's

Moody's Investors Service on Friday said India's conservative budget assumptions leave room for the government to respond to prevailing macroeconomic and pandemic risks over the next year.

The government assumes that inflation-adjusted real GDP growth for fiscal 2021 will come in at 9.2 per cent in the current fiscal ending March 2022, following growth of 13.6 per cent in the first half of the fiscal till September.

Mirroring the government's conservative growth assumptions, the revised budget estimates for fiscal 2021 show revenue receipts growing only 27.2 per cent, which leaves some scope for further gains once the fiscal accounts are tallied at the end of March 2022, Moody's said.

In its report Moody's said the focus on capital expenditure in 2022-23 Budget supports near-term growth, but poses challenges to longer-term fiscal consolidation.

India's budget projects a narrowing in the central government deficit to 6.4 per cent of GDP in fiscal 2022, from an estimated 6.9 per cent in fiscal 2021.

"The budget is characterized 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 per cent of GDP by fiscal 2025 remains undefined," it said.

The central government recorded a 67.2 per cent rise in revenue receipts over the first eight months of the fiscal year.

The strong revenue outcome offsets underperformance on disinvestment. The government now expects disinvestment receipts of only Rs 78,000 crore (around 0.3 per cent of GDP) in fiscal 2021, compared with the target of Rs 1.75 lakh crore (0.8 per cent of GDP) announced in last year's budget.

"Relative to the government's assumption of 11.1 per cent nominal GDP growth for fiscal 2022, its projection of a 6 per cent 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," Moody's said.

It said prominent risks to the deficit target of 6.4 per cent of GDP for fiscal 2022 include the pandemic and inflation. 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 per cent of GDP," Moody's said.