Moody’s to look at quality of spending in Budget

Moody’s has pegged India’s growth rate at 7.5 per cent for both 2016 and 2017. Moody’s say the global outlook is now looking weaker than their previous forecast, largely because of the China slowdown and tighter financial conditions. But, India remains a bright spot and has been relatively insulated from what’s happening globally. Moody’s expects the government to stay broadly in range with the fiscal deficit target of 3.5 per cent. Speaking to Bloomberg TV India , Moody’s Senior vice president for Sovereign Risk Group, Marie Diron, says the rating agency will be watching for the quality of spending and revenue measures in the forthcoming Budget.

What is making Moody’s believe now that the global growth outlook is starting to look a little tougher in the new year and even over the next two years?

We forecast a lacklustre growth at the global level. In terms of GDP growth rates, we are looking at around 2.5 per cent growth this year and just under 3.5 per cent growth next year, well below historic averages and certainly below pre-crisis averages. This is not new. Our forecast has shown tepid growth pattern for some time. What we stressed this time around really is the downside risk and that relates to a number of factors—one is that the adjustment by commodity producers is still very much underway. We assume commodity prices will stay low for a long period and the economic and fiscal adjustment will take several years. The economies most affected are the largest ones, like Brazil and Russia, where we forecast sizeable recession this year. The other factor is we see a very gradual slowdown in GDP growth in China. But the impact on the rest of the world will be much significant as a slowdown in China comes with a sharp contraction in imports.

You have pegged India’s growth at 7.5 per cent during FY17. We have definitely something to cheer about given the slowdown across the world. But there are concerns like the stressed bank balance sheets. How worried would you be about the financial system? Or do you think we are quite safe given the fact that we have insulated largely compared to other peers from the China slowdown?

India’s macro economic outlook is really a mixed one. So, the GDP growth of 7.5 per cent is a highest growth rate in the G-20. That means, income gap and other economies will close in coming years. India benefits at the moment from the international environment. It benefits from lower commodity prices and in a way benefits from being relatively insulated from international capital flows. So, it is not as exposed as some other emerging markets. May be the GDP growth rate hides some of the constraints at the moment, which are very much on the bank lending side. So the cleaning up of the balance sheets would be positive in the medium term if it really succeeds and unlocking lending to more productive sectors. In the short term, it is constraining growth. We have seen it in some of the weak investment numbers.

Close on the heels of the Budget, I want to get a sense of how closely the rating agencies across the world are watching it and the deficit numbers. We have a huge outgo— ₹1 lakh crore — on account of Pay Commission mandate this year. Do you perceive increasing pressure to deviate from the 3.5 per cent fiscal deficit target?

For India, given the recommendation by the Pay Commission for substantial pay increase, we expect that will put some constraint and pressure on overall spending. We do expect to see some cuts in other areas. It is really about managing fiscal policy in a way that nurtures growth. So, we will look at the quality of spending and revenue measures as well as the quantity. India benefits from being relatively less exposed to international investors and of course it is exposed to domestic investors. And ensuring that confidence in the overall direction of fiscal consolidation it maintains is very important.

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