With Moody’s Investors Services issuing a clear warning alongside Friday’s ratings upgrade that India’s rating could be downgraded if its fiscal metrics and the outlook for general government fiscal consolidation deteriorates materially, a slew of lingering worries are likely to cast a shadow over the fisc in the coming months: Burgeoning bad loans, fresh uncertainty on the revenue projections from the
GST front, slack private investments and subdued non-tax revenue trends.
Moody’s has already cautioned about the debt scenario. High debt/GDP ratio is likely to increase in the next two years on slower growth. Then there are problem areas like power and telecom, farm loan waivers and Rs 2.11 lakh crore bank recapitalisation (to be funded by recap bonds). So the actual fiscal deficit could turn out to be much larger.
The government has set a fiscal deficit target of 3.2 per cent of the GDP, but it may come at a cost of over Rs 70,000-crore cut in capital expenditure, according to an SBI research report. More worrying will be how the deficit of states plays out in the wake of GST. When asked about his comments regarding the glide path at an event in Singapore, finance minister Arun Jaitley said: “I said exactly what I have said today that we have maintained fiscal discipline. We will continue to maintain the glide path.” But many analysts are not convinced. “Even as the rating agency expects reform measures to reduce the risk of sharp rise in debt, near-term concerns persist in terms of government adhering to its fiscal glide path especially in the light of the incremental spending undertaken to boost economic growth,” said a note from Franklin Templeton Investments.
The upgrade has come after India’s economic growth unexpectedly slowed to 5.7 per cent in the June quarter, the slowest in three years, amid the disruption caused by the rollout of the GST and demonetisation shock. The removal of a number of commodities from the two highest tax brackets to lower brackets is unlikely to help matters on the revenue front. The first volume of the Economic Survey released in January had projected growth in the range of 6.75-7.5 per cent in 2017-18 against 7.1 per cent in 2016-17. The Index for Industrial Production (IIP) growth fell to 2.5 per cent in first six months of 2017-18 as against 5.8 per cent in same period of last year.
“This is why I remarked the rating upgrade now as surprising. Given the evident pressures on the fiscal front and the likelihood that the government may not even meet this year’s and next year’s fiscal target, the rating upgrade seems to have come at a wrong time,” said Arvind Chari, head fixed income & alternatives, Quantum Advisors. “Markets should worry that the government, now having received the rating upgrade, may actually slacken and relax its commitment to reducing fiscal deficit, as per the stated plan…” Burgeoning bad loans and overleveraged Indian corporates are posing a big risk to the revival of investments. Gross non-performing assets of 36 banks have increased from Rs 2.94 lakh crore in March 2015 to Rs 8.38 lakh crore by September 2017, says a Care Ratings report. The overall growth over March 2015 was 185 per cent and 152 per cent over September 2015. Credit offtake remains sluggish in single digits as the private sector is not coming forward to invest in projects.
There is some uncertainty regarding the collections on the indirect tax front, with the rollout of the Goods and Services Tax (GST) from July 1. Amid high claims of transitional credit and refund claims by exporters, a lot of revenue is also stuck as Integrated GST (IGST), which can be utilised only when it is claimed for payment of IGST, Central GST (CGST) and State GST (SGST), as per the legally defined order. The rationalisation of tax rates under GST have added to the strain on the revenue front. The cut in tax rates for over 200 items coupled with a reduction in rates for all restaurants, barring those in starred hotels, to 5 per cent announced last week are estimated to result in a revenue loss of Rs 20,000 crore.
Worries are also on the non-tax revenue front owing to lower surplus transfer from the Reserve Bank of India and a high disinvestment target of Rs 72,500 crore. The government has garnered Rs 37,839.35 crore (as on November 16) as disinvestment proceeds in the current financial year.
Source: indianexpress.com