Relatively higher oil prices seen over the last two years and rising interest rates are raising pressure on India's budget and current account, although mitigated by robust GDP growth and other factors, according to new research.
In a note to clients, rating agency Moody’s, which gives India a rating of Baa2 with a ‘stable’ outlook, said the country’s growth prospects remain in line with the economy's potential, of around 7.5% growth this year and next but "higher oil prices and interest rates” will put pressure on the government's budget and the current account.
Joy Rankothge, Vice President and Senior Analyst at Moody’s said, "This robust growth, large foreign exchange reserves, a predominantly domestic funding base, strengthened monetary policy management, and macroprudential regulations on bank lending in foreign currency will broadly contain the credit impact of the higher oil prices and rising interest rates.”
Oil prices at current levels will raise expenditures and add to existing pressures on the fiscal position stemming from the lowering of goods and services tax (GST) rates on a range of consumer goods and a tax cut for small businesses as well as the relatively high minimum support prices set for this year, the agency added.
Although the deregulation of both diesel and gasoline prices in India has reduced the fiscal impact of rising oil prices, liquefied petroleum gas (LPG) and kerosene remain regulated and subject to subsidies, which were budgeted at 0.5% of government expenditures for the year ending March 2019.
“While the government may cut back on capital expenditures to limit fiscal slippage, as has happened in previous years, such cuts may not fully offset the revenue losses and higher spending on energy subsidies and price support for crops,” Moody’s added.
The agency therefore sees risks that the central government deficit will be wider than targeted in the short term. “However, a temporary fiscal slippage, if any, will not offset India's robust nominal GDP growth and large domestic financing base which helps keep the government's debt burden broadly stable.”
With the current account, higher oil prices will contribute to a wider deficit, but the gap will remain significantly narrower than five years ago. The report also notes that economy-wide external debt is limited and the country's foreign exchange reserve buffers are ample. Overall, Moody's continues to assess India's external vulnerability risk as “low.”
