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Budget deficit would widen in FY18 but steps taken by govt may help to narrow it in years ahead: Moody's

Global rating agency, Moody's Investors Service has said that India's budget deficit would widen in 2017-18, due to lower taxes and higher public expenditure. But it also said that steps taken by the government to broaden the tax base and improve spending efficiency would help in narrowing it going forward. Moody's V-P (Sovereign Risk Group) William Foster has said the agency believes that the government's commitment to fiscal consolidation remains and sustained growth would help it reduce debt burden. India's debt-to-GDP ratio stood at 68.6% and a government-appointed panel has recommended lowering it to 60% by 2023.

Foster said that they forecast the general government budget deficit at 6.5% of GDP this fiscal year, similar to the last two fiscal years. Lower government revenues than planned in the Budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted. However, over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a gradual narrowing of the deficit. Together with robust and sustained nominal GDP growth, this would be conducive to a gradual decline in the government debt burden.

Moody's V-P (Sovereign Risk Group) added that a material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating. General budget deficit includes expenditure incurred and revenue earned by both the Centre and states. He further said that the rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply.

Moody's had recently upgraded India's sovereign rating for the first time in over 13 years and Foster said the upgrade reflects the expectation that continued progress on economic and institutional reforms will enhance India's high growth potential and its large and stable financing base for government debt and will likely contribute to a gradual decline in the general government debt burden over the medium term.

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