India will find it tough to meet its fiscal deficit target for the new year starting in April, given its plans to cut taxes and step up spending on infrastructure, Moody's Investors Service said.
"We consider the likelihood of meeting the deficit targets quite remote," Kristin Lindow, a New York-based India analyst at the rating agency, said in an e-mail reply to questions from Reuters on the Indian budget.
"The government can ill-afford to be so generous in light of its already large and growing debt burden."
On Friday, the Indian government announced cuts in customs and excise duties and tax breaks for ordinary people in its budget for the next fiscal year, but said it expected tax revenue to rise 13 per cent due to higher growth and changes in tax rules.
"The key to the longer-term success of this more expansive strategy is whether or not growth is stimulated by enough (so that) the extra revenue...compensate(s) for the new spending initiatives and tax reductions," Lindow said in her e-mail, which Reuters received over the weekend.
"That is unclear in the current global and domestic environment."
The Indian government is counting on robust growth and savings on interest payments to help contain next year's deficit at 5.6 per cent of GDP, against this year's estimated 5.9 per cent.
It forecasts the economy to grow by over six per cent next year, compared with this year's estimated 4.4 per cent growth, which was dented by the country's worst drought in 15
The government has proposed infrastructure projects that will cost around 600 billion rupees, but has budgeted to spend just 20 billion rupees of its money, as it hopes to get the rest from private players.
The finance ministry also expects a net gain from changes in tax rules, with changes in indirect taxation to boost revenue by 32.94 billion rupees, although this will be offset by new direct tax breaks costing 29.55 billion rupees.
The government expects huge savings from swapping federal and state governments' high-cost borrowings with bonds that have lower interest rates.
A surprise one percentage point cut in the rates it offers on some large government-run savings schemes, which it announced in its budget, will also reduce costs.
Lindow said the government's only option was to lengthen the maturity structure of its debt, but that would succeed only so long as the market was willing to absorb additional borrowings.
She said the private sector had to be coerced into financing the faster growth so that the cash-strapped government could eventually pull back before it faces a real refinancing crunch.
Reuters
