India likely to meet fiscal deficit target for 2018-19, high oil price may widen CAD: Moody’s
11 june 2018
Ratings agency Moody’s Investors Services said India is likely to meet its fiscal deficit target of 3.3 per cent of Gross Domestic Product (GDP) for the fiscal year ending 31 March 2019, adding that high crude oil prices could widen the country’s current account deficit.
“Moody’s Indian affiliate, ICRA Limited, says that high global crude oil prices are likely to widen India’s current account deficit and points to slowing foreign portfolio investments as an area of concern,” the report said.
According to William Foster, Vice President and Senior Credit Officer at Moody’s, some downside risk to budgeted revenue and expenditure targets exists but the government would cut back on planned capital expenditure, as has occurred in past years, if it is needed to offset any slippage from its fiscal targets. Moody’s sees some downside risk to the government’s assumptions on the collections from the Goods and Services Tax (GST) and petroleum products excise duty.
“If global oil prices remain at current levels, ICRA expects India’s current account deficit to widen to 2.4 per cent of GDP in 2018-19 from 0.7 per cent of GDP in FY2017,” said Aditi Nayar, Principal Economist with ICRA. She added higher crude oil prices and a weaker Rupee would improve remittances and the services trade surplus in FY2019, offsetting some of the adverse effects of rising commodity prices.
If global oil prices remain high, the government could intervene by reducing excise duty on petroleum and diesel products, which would exert negative pressure on the country’s sovereign credit profile, the report said. Excise duties make up over 20 per cent of retail selling prices. “Higher oil prices will have a limited impact on subsidy expenditure by the government, as petrol and diesel prices have been deregulated, leaving only liquefied petroleum gas (LPG) and kerosene subject to subsidies,” Foster said.
The report said subsidies on energy products will not change in the near term but any unexpected pre-election-related spending could exert pressure on budgeted expenditure targets. ICRA expects the average Consumer Price Index (CPI) inflation to rebound by 100 basis points to 4.6 per cent in the current fiscal.
If the average price of Indian crude oil basket climbs to $80 per barrel in 2018-19 and higher prices are completely passed on to domestic fuel prices, average CPI inflation may increase to around 4.9 per cent in the fiscal, unless central and state taxes are reduced, which could prompt rate hikes by the Monetary Policy Committee, according to ICRA.
The agency also expects GDP growth to rebound to 7.1 per cent in current fiscal, reversing the dip recorded last year. A normally distributed monsoon, increases in Minimum Support Price (MSP) for various crops, and staggered pay revisions by some state governments would support consumption growth in 2018-19.
Source: ET ENERGYWORLD