The Telegraph
Since 1st March, 1999
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Moody’s doubts fiscal resolve

Mumbai, Feb. 26: With just two days left for the Union Budget, the international credit rating agency Moody’s Investors Service is doubtful whether any aggressive attempt will be made to bring down the budget gap due to the upcoming state elections followed by the general elections and “divisive domestic politics”.

Moody’s expressed these views in its new annual report on India. The rating agency’s analysts are also worried about the structural economic problems like the poor state of government finances which will increasingly arrest growth and revenue prospects through infrastructure and social development shortfalls.

“With state/national elections on the horizon and divisive domestic politics, the rating agency believes an aggressive effort to narrow the budget gap cannot be implemented in the near term,” said the report.

“Still, Moody’s is guardedly hopeful that the finance minister will propose measures to incrementally reduce the huge budget shortfall in his maiden budget announcement on February 28,” it added.

Healthy external liquidity merited the recent upgrade of its country ceiling for foreign currency debt to Ba1. However, the government’s fiscal problems keep the rating at sub-investment grade, the agency added.

The government’s local currency debt rating remains at Ba2, with a negative outlook, as a consequence of its more onerous burden of domestic debt and debt service.

The country ceiling on foreign currency-denominated bank deposits likewise stands at Ba2 with a negative outlook, reflecting Moody’s assessment of the close linkage between the risk of a government domestic debt restructuring and the potential for restrictions on large foreign currency withdrawals from the banking system, it said.

Moody’s points out that India’s external liquidity and vulnerability ratios now compare very favourably to others in its rating peer group. Double-digit export gains and a prospering information technology sector have belied the slowdown in the global economy, and the balance of payments surplus has been bolstered as well by increasing capital inflows.

Its report further stated that the country’s strong foreign assets are likely to cushion the balance of payments against macro-economic or political shocks, especially as capital controls are eased gradually going forward.

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