After putting out a warning just a week before the Budget, and calling the sharp hike in the current account deficit (CAD)—from less than 1% of GDP in the first half of the 2000s to 5.4% of GDP in the September quarter—a “credit negative” event, ratings agency Moody’s post-Budget comments are encouraging. While doubting some of the assumptions made in the Budget, such as the high tax targets as well as the low subsidy outgo projections, Moody’s note on the Budget says it pursues “realistic fiscal consolidation, a credit positive for the sovereign”. Indeed, given the number of times the rating agency uses the term “credit positive”, you’d think Moody’s was readying to raise India’s credit ratings.
How does Moody’s reconcile its conflicting views of the Budget’s revenue assumptions being too optimistic with the expenditure assumptions such as on reduction in subsidies being unrealistic? Clearly, like many others, Moody’s believes that, as the finance minister has done in FY13, he will slash Plan or capital expenditures if the revenue forecasts don’t work out. In FY13, while the actual subsidy outlay grew 18% as compared to the Budget forecast of it falling by 13%, the finance minister managed to stick pretty close to the fiscal deficit by capping growth in capital expenditure to a mere 6% as compared to the budgeted 29%.
Moody’s is especially positive about the impact of the increased prices of high speed diesel—this will lower the negative impact on oil PSUs and also allow them to increase capital spending—and says the increased tax benefit from the re-introduction of the investment allowance will outweigh the impact of the higher surcharge on corporate profits. The increase in gas prices, when it happens, will also lead to a sharper hike in profits for both ONGC and RIL—while each $1 hike in gas prices will mean $200 million in higher revenues for each 10 billion cubic metres (bcm) of gas, RIL is expected to produce 8-10 bcm of gas in FY14 and ONGC around 23-25 bcm. Of course, this has its downside, since higher gas prices will mean greater strain on electricity company bottom lines, a point that Moody’s brings out while talking of pooling of local and imported coal prices.
In short, the key to the Budget being positive, and presumably to Moody’s ratings over the year, will be the government’s ability to clear stuck projects since that is the only way to increase investment/output in a meaningful manner while both consumer as well as government consumption remain weak—as Moody’s points out, the government’s ability to meaningfully reduce the deficit “will negatively affect growth” in exactly the way it did in Q3FY13 when GDP growth fell to just 4.5%. For now, while most doubts on the fiscal deficit seem to have been settled, the CAD remains the big imponderable along with how it is to be financed. While FII flows recovered the day after the Budget—they withdrew $237 million the day of the Budget but brought in $168 million the day after—the rupee has fallen from 53.87 to a dollar the day before the Budget to 54.91 on Monday. It touched 55.14 intra-day, a level not seen for at least a couple of months now.