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Mumbai, March 4: Moody’s Investors Services today said finance minister P. Chidambaram’s budget offered a realistic plan to cap fiscal deficit at 5.2 per cent of GDP this year in its quest for fiscal consolidation and seemed to hint that it wasn’t considering a sovereign downgrade.
In a special commentary on last week’s budget, the global credit ratings agency today said the fiscal consolidation plan was “credit positive for the sovereign”.
Chidambaram has promised to bring down the fiscal deficit to 4.8 per cent of the gross domestic product (GDP) from 5.2 per cent in the revised estimates for the current fiscal.
“This plan of modest fiscal consolidation is credit positive for the sovereign because, against a backdrop of subdued GDP growth and upcoming elections, it is a realistic effort to correct India’s macroeconomic imbalances,” Moody’s observed.
According to Moody’s, the government’s tax changes and investment incentives affect corporate houses and are credit positive for downstream oil marketing companies and steel companies.
Further, the budget’s equity capital infusions into public sector banks and increased tax-free bond limits are credit positive for public and private sector banks and government-related financial institutions.
Moreover, the measures to stimulate private investment in infrastructure are credit positive for infrastructure companies, and especially those invested in clean and renewable energy such as wind power.
Moody’s has assigned a BAA3 rating to India, which is the lowest investment grade with a stable outlook. The other two international credit ratings agencies — Standard & Poor’s (S&P) and Fitch — have a negative outlook on India.
The rating agency further said that fiscal consolidation proposed by Chidambaram could pave the way for monetary easing, which would revive growth. It however, added that the extent of easing, would depend on the assessment of the Reserve Bank of India on the commitment of the government to contain fiscal deficit in the budget.
The RBI had been insisting on a sustained commitment to fiscal consolidation to help it to ease monetary policy.
It is set to announce the mid-term review of monetary policy on March 19 and there are expectations that the central bank may bring down the repo rate by 25 basis points then.
The repo rate is that at which the RBI provides liquidity to banks.
However, Moody’s was of the belief that the quality of government’s spending cut was sub-optimal, even as it expressed the apprehension that achieving the divestment target of Rs 40,000 crore from selling stakes in state-owned companies would be a challenge.
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