‘The major risks to the deficit target of 6.4% of GDP for FY22 include pandemic and inflation.’
Moody’s Investors Service said the Union Budget presented on February 1, 2022 is growth-oriented, debt positive for many issuers but
Budgetary provisions pose fiscal challenges. “pay attention” [of the budget] Supports near-term growth on capital expenditure, posing challenges for long-term fiscal consolidation. India’s budget estimates a marginal reduction in the central government’s deficit,” Moody’s said.
While conservative budget assumptions leave room for the government to respond to the prevailing macroeconomic and pandemic risks next year, the path towards the government’s medium-term deficit target remains undefined. “Public expenditure for highways and railways to remain high; Sovereign Green Bonds to raise money for public projects to reduce carbon intensity. Higher infrastructure spending is a 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 continued government spending on infrastructure projects will boost demand from key user industries which is a debt positive. “Conditions will remain supportive for most non-financial companies in FY 2023. The budget is positive for steel, cement, housing and solar photovoltaic (PV) module manufacturers, as well as downstream oil companies,” it said.
Budget support for medium, small and micro enterprises is positive for banks and non-bank financial companies. “The extension of the quantum and duration of securing government-guaranteed work loans for medium, small and micro enterprises (MSMEs) will be supported. Asset quality of banks and non-bank financial companies (NBFCs). The introduction of Digital Rupee will further enhance payment efficiency and financial inclusion,” it said.
It said the stock market listing of Life Insurance Corporation of India (LIC) is positive for its financial flexibility, governance and risk management. It said that economic expansion from government spending will increase the demand for insurance cover.
Moody’s said the budget is projected to limit the central government’s deficit to 6.4% of GDP in FY22 from 6.9% projected in FY21. The economy continues to recover from its pandemic trough. While conservative budget assumptions leave room for the government to respond to the prevailing macroeconomic and pandemic risks next year, the path towards the government’s medium-term deficit target of 4.5% of GDP by FY2025 remains undefined, It said.
“Strong economic growth outpaces revenues in FY21, but the blow of the pandemic prevents fiscal consolidation. The government assumes that inflation-adjusted real GDP growth for FY21 will be 9.2% year-on-year, following a growth of 13.6% in the first half,” it added.
“Given the government’s conservative growth assumptions, revenue receipts have increased by only 27.2% in the revised budget estimates for FY21, leaving some scope for further gains after reconciliation of fiscal accounts at the end of March 2022. The central government recorded 67.2% growth in revenue receipts in the first eight months of the financial year,” it said.
To accommodate this large increase, government projects spending not related to capital expenditure, 1.8% in nominal terms and 1.5 percentage points as a share of GDP, regarding the cessation of stimulus measures and the waning effect of price pressures. Reflects the attitude of the government. Specifically, it projects subsidies for fertilisers, food and fuel to drop 26.6% from ₹3.2 trillion (1.2% of GDP) in fiscal 2021 to ₹4.3 trillion (1.9% of GDP); Due to the government’s provision of free food grains and pulses during the pandemic, the subsidy bill had earlier increased to ₹7.1 trillion (3.6% of GDP) in FY20. Total central government spending is projected to fall to 15.3% of GDP, driving the deficit, it said.
Against the government’s assumption of 11.1% nominal GDP growth for FY22, the 6.0% growth in revenue receipts appears achievable, buoyed against the fall in dividends from corporate tax, income tax, and goods and sales tax (GST). GST) balances the receipts. Other non-tax revenue, it said. “Consequently, the budget estimates revenue receipts to fall marginally to 8.6% of GDP from 9.0% in the revised estimates for FY21,” it said.
Unlike previous budgets, which saw disinvestment receipts as the major source of funding, the estimated contribution of capital receipts for FY 2022 has come down significantly to Rs 650 billion (0.3% of GDP) from Rs 2.1 trillion. is as high as Rs (1.0%). % of GDP in fiscal 2020, Moody’s said.
It said the key risks to the deficit target of 6.4% of GDP for FY22 include pandemic and inflation. “Both of these factors may lead to additional spending to support the economy, although performance risks related to capital expenditure may reduce overall spending. The announced budget is in line with our vision of gradual fiscal consolidation and a sustained increase in government debt to around 91% of GDP by next year,” it said.
It said long-term spending pressure depends on possible reforms in India’s fiscal profile. Moody’s said that although Finance Minister Nirmala Sitharaman reiterated the government’s intention to meet her previously announced medium-term deficit target of 4.5% of GDP by FY2025, she did Do not specify a road map. “Given the government’s stated ambitions to accelerate infrastructure development and promote inclusive growth, while meeting other climate change-related commitments, expenditure pressures are likely to outpace near-term layoffs from a pandemic.” By inspired encouragement,” it said.
Despite the reduction in spending from the peak in FY20, the budget is still larger than the 10-year average before the pandemic as a share of GDP. In addition, rising interest rates can add to already high debt servicing costs and impair the ability of the loan, as measured by interest payments to revenue.
The government did not foresee any potentially significant measures to broaden the tax base, which depends on a healthy tax buoyancy and increased tax compliance to boost revenues, at least during the upcoming budget year.
Furthermore, it may be challenging for the government to pursue physical revenue reforms with general elections due by mid-2024, as well as various state elections before that. India’s fiscal strength is therefore unlikely to increase and will continue to be a major credit challenge compared to peers.
Public spending for highways and railways will remain high; Sovereign Green Bonds to raise money for public projects to reduce carbon intensity.
The government’s announcement that it will keep public infrastructure spending at a high level is positive for companies in the sector. In FY21, the government spent 11% more than the budget estimate on highways and 9% more on railways. Increased public investment helps to remove infrastructure bottlenecks and support future private investment.
The total capital expenditure outlay by the government for FY22 is 24.5%, from a higher base, higher than the FY21 Revised Estimates (see Performance 5), and 35% higher than the Fiscal 2021 Budget Estimates.
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