Budget Shows India's Economic and Fiscal Revival Will be Slow: Moody's

India's 2014 budget supports the view that the trend of fiscal and economic weakness in the country will reverse, but a lack of specific measures to achieve the targets indicate that such a reversal will be slow and calibrated, Moody's Investors Service said.

The newly elected BJP government presented its maiden budget on 10 July, and Finance Minister Arun Jaitley has accepted the 4.1% fiscal deficit target set by the outgoing government in the interim budget. However, Jaitely has set the 2017 target at a very aggressive 3%.

The rating agency said such a narrowing in the fiscal deficit would stem further weakening of government finances and address a key constraint on India's Baa3 sovereign rating.

Moody's, however, added that it is difficult to assess the likelihood that future deficit targets will be met as the budget announcement lacked details on revenue and expenditure measures to lower the deficit.

"The government's announced intention to reduce subsidy expenditures was not accompanied by proposed changes to the current subsidy regime. Similarly, the commitment to implementing the long-planned Goods and Services Tax was reiterated, but without guidance on its details," said Atsi Sheth, a senior vice president at Moody's.

"Moreover, unless GDP growth revives from current levels, tax revenues could be lower than forecast, jeopardising the deficit target," New York-based Sheth said in her post-budget comments emailed to the press.

The budget also announced pro growth measures such as an increase in foreign direct investment in insurance and defence sectors and specified spending on irrigation, road-building and other infrastructure development. Tax exemption limits were raised for households and tax incentives were announced for investment in manufacturing.

Moody's said those measures could contribute to growth but are unlikely to lead to a significant acceleration from current levels unless accompanied by a decline in inflation, interest rates and regulatory constraints on investment.