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Cut Capital Expenditure to Boost Credit Rating: Moody’s
Ever since investigative agencies opened the Pandora’s Box and unearthed a long list of corporate scams there has been a negative outlook on India’s credit rating. With the new government in power, there is a sudden burst of fresh air. At least it looks like so. This sudden change from despair to hope though is yet to translate into a good credible credit rating for India though.
Economic growth revival and fiscal consolidation
India's accelerating economic growth will give a boost to tax revenue and help the country meet its fiscal-deficit target, but its credit profile won't improve unless the government significantly reduces long-term spending commitments, Moody's Investors Service said Wednesday.
"A decline in the deficit based on revenue buoyancy alone would be credit neutral at best, as the fiscal position would remain vulnerable to future cyclical downturns and external shocks," it said.
"On the other hand, a significant reduction in long-term expenditure commitments, particularly those that are exposed to inflation, global or currency shocks, could lower this vulnerability."
India's high spending on fuel, food and fertilizer subsidies has strained the government's finances and increased the economy's vulnerability to global oil-price and currency shocks.
For the fiscal year ending March, the government aims to narrow the deficit to 4.1% of gross domestic product from 4.5% a year earlier, on the back of higher tax collections as the economy recovers from its worst slowdown in years. But that level still is higher than in similarly rated countries and it isn't clear if the Indian government will reduce long-term spending, Moody's said.
Government data Friday showed India's economy grew 5.7% on year in the quarter ended June, the strongest pace in more than two years, lifting optimism about investor interest in Asia's third-largest economy.
The pros and cons of the story so far
Moody's said that while more capital is expected to flow into the economy, portfolio investment—usually short-term money that comes into financial markets—can pull out in times of crisis and hurt the economy.
India should look at improving the competitiveness of its manufacturing industry by lowering inflation and developing infrastructure to improve its credit profile, it added.
Moody's rates India debt Baa3, its lowest investment grade, with a stable outlook.
