On the fiscal front, Moody’s noted that “efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility.”
But there is reason to be cautious.
General government debt (Centre and states) which stood at 68 per cent of the gross domestic product (GDP) in 2016 is expected to rise further to 69 per cent, placing India higher than the median debt ratio (44 per cent) of countries rated Baa2. Add to this the expected increase in central government debt on account of bank recapitalisation and higher state debt on account of farm loan waivers etc., and the situation is worrying.
But while Moody’s cautions that any fiscal slippages along with a deterioration of the health of the banking system would put negative pressure on the rating, it does point out that the impact of the high debt load is offset to some extent “by a large pool of private savings available to finance government debt”. It expects the “debt burden to remain stable over the next few years, falling thereafter as nominal GDP growth continues and revenue-broadening and expenditure efficiency-enhancing measures take effect”.
On reforms of factor markets — notably land and labour — the report points out that “important measures which have yet to reach fruition include planned land and labour market reforms, which rely to a great extent on cooperation with and between the states.”