Global Economy

A weaker Modi government will slow India's fiscal tightening, Moody's says



The debate is on: Can a weakened Narendra Modi government continue its work of shortening the fiscal gap, that it has been able to do in the last few years? Doable, say economists, but perhaps not at the pace it would’ve preferred to.Following exit polls, analysts were pretty optimistic about the Indian economy’s fiscal deficit coming down to its target of 4.5 per cent by FY26. But that was when they predicted a landslide victory for the BJP-led NDA. Reality has turned out to be quite different: NDA has the numbers to form a government at the Centre, but the BJP on its own is far short of the majority of 272 seats needed in the 543-seat strong Lok Sabha.

The narrower margin of victory for Indian Prime Minister Narendra Modi’s alliance in elections will forestall reforms that could have potentially facilitated aggressive fiscal consolidation, an analyst at Moody’s Ratings said told news agency Reuters in an interview.

If BJP, like it did in 2014 and 2019, won over 273 seats on its own, it could’ve pushed on with curbing the gap at a far aggressive speed.

“It looks like the prospects for even more aggressive consolidation are not as bright as before they were prior to the election results,” Christian de Guzman, senior vice president, sovereign risk group, Moody’s said. “I still think that the prospects for consolidation will remain intact, and they will retain a level of fiscal discipline.”

India’s fiscal deficit plans

India wants to narrow its fiscal deficit to 4.50 per cent of gross domestic product by the end of FY26, from the 5.1 per cent projected in the current year ending in March 2025. Some reports say that India is now likely to bring down its FY25 fiscal deficit target to 4.9 per cent.The smaller mandate for Modi raises risks of more populist spending to consolidate political support, Guzman said. BJP in its manifesto did not give many hints of populist spending, neither did the Interim Budget announced by Finance Minister Nirmala Sitharaman.The full budget due to be announced in July would account for the government’s plans with the Reserve Bank of India‘s record Rs 2.11 lakh crore worth of surplus transfer.

It could use it to further consolidate the fiscal position or to garner political support, Guzman said. “A shaky political outcome perhaps suggests higher odds for the latter.”

Challenges to ambition

Fitch Ratings said the weakened majority for Modi’s alliance could pose challenges for the more ambitious elements of the government’s reform agenda.

Guzman said India’s high growth and robust economic prospects over the medium-term were already factored into their ratings as was also the progress made on macroeconomic and financial stability.

In order to upgrade India’s sovereign outlook or rating, Moody’s would need to see a “much more material improvement on the fiscal side,” Guzman said.

This requires a material reduction in government debt, an improvement in debt affordability, or what proportion of revenue is accounted for by interest payments or debt servicing, he added.



READ SOURCE

This website uses cookies. By continuing to use this site, you accept our use of cookies.