Risk Category- Economic Risk
Introduction
Moody’s Credit Ratings agency has declared its predictions for fiscal policy of the newly elected government. Fiscal policy is the use of government tax policies and spending to influence a country’s macroeconomic conditions such as aggregate demand, employment, and inflation. Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) and BJP-led NAtional Democratic Alliance (NDA) coalition secured victory with narrower margin as the BJP in itself failed to secure the number of seats required to form the government. In fiscal policy, fiscal tightening is the deliberate reduction in demand through lower government spending, whereas fiscal consolidation constitutes policies aimed at reduction in fiscal deficits. In this context, Moody’s Ratings predicts limited fiscal tightening and consolidation. The prediction suggests forestalling reforms that could have facilitated fiscal consolidation given that the party does not hold the unrivaled power to pass or continue previous reforms in the parliament.
Analyst Comments
Moody’s rates creditworthiness of companies, governments, and fixed income debt securities. Moody’s is regarded as important for the Indian economy as its ratings influence foreign direct investments (FDI) as well as the government’s ability to borrow from the international creditors by taking into regard the fiscal deficit of the country.
India plans to narrow (fiscal consolidation) its fiscal deficit to 4.50 per cent of the GDP by the end of the Financial Year (FY) 2026 from the 5.1 per cent projected in the current FY, ending in March 2025. India’s Debt-GDP ratio for FY 24 stood at 54.5% while fiscal deficit-GDP ratio stood at 5.9%. In FY24, the combined fiscal deficit of central and state governments may amount to 9.4% of GDP, leaving limited scope for borrowing by the private sector and the Public Sector Units (PSUs). As the combined fiscal deficit is brought down, progressively more investible resources would become available for the private sector for investment in the economy enabling growth and employment. To incentivize private investments as well as to induce economic growth, fiscal consolidation is an imperative objective for the Indian economy.
However, with the return of the coalition government and the BJP now dependent on other NDA partners for continued governance, it could prove challenging to achieve fiscal consolidation. The government would be more divided and dependent on its coalition partners to achieve its objectives and make reforms. The third Modi government with a smaller mandate raises the risk of more populist spending policies to consolidate political support leading to challenging fiscal policies. Moody’s said it would need to see material improvement on the fiscal side to upgrade India’s sovereign outlook. Sovereign outlook is necessary for any economy or country as sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt of a particular country, including political risks. While this might still remain a speculation, and as Moody’s is a renowned credit rating agency for international businesses and governments, predictions along these lines could hurt investment opportunities in India to fuel economic advancement and negatively impact India’s globalizing economy.
