Moody's raises concerns on growth projections in FY21 Budget

Even before the dust settles on the budget, rating agency Moody's has raised concerns on the most crucial number - the nominal economic growth projection (GDP), which forms the basis for tax collection and deficit projections.

The Moody's Investors Service on Tuesday said economic growth projections made by Finance Minister Nirmala Sitharaman in her Budget for 2020-21 appear ambitious given the structural and cyclical challenges facing the Indian economy.

The Budget projected nominal GDP growth of 10% in 2020-21. But in the current year, the nominal GDP is expected to grow less than 8% and economists do not see any betterment in the next financial year, too.

"These forecasts appear ambitious given the combination of structural and cyclical challenges that the Indian economy faces," Moody's said in a note.

"We expect the economy to rebound at a more modest pace, with nominal GDP growth rising to around 8.7 per cent in fiscal 2020 and 10.5 per cent in fiscal 2021, from about 7.5 per cent in fiscal 2019," it said.

The finance ministry, however, tried to tone down Moody's concerns as Economic Affairs Secretary Atanu Chakraborty said the Indian economy is more robust than meets the requirement of investment-grade and above.

“I am not at all worried since I see the numbers much more closely, I am strongly confident of the inherent robustness of the economy. It is far too robust than our numbers reflect," Chakraborty said to a question on whether he feared any rating downgrade.

He, however, said that the government will address the concerns of the rating agencies.

"We have to have a dialogue with them. So, we will keep assuaging their fears. The fear is not about this number but the numbers arising out of the future impact -- debt-to-GDP ratio, interest coverage and so on and so forth and, in turn, how the entire economy is behaving,” the secretary said.

Moody's said the government will also face challenges in achieving its deficit target for the fiscal year ending March 2021, amid persistent structural and cyclical headwinds to growth.

The fiscal deficit estimate has been substantially raised to 3.8% in the current year from an earlier estimate of 3.3%.

"While the latest budget targets a narrower deficit, prolonged weakness in nominal GDP growth in India, combined with lower revenue collections, has dampened the outlook for fiscal consolidation, raising the risk that the debt burden may not stabilize," Moody's said.