States’ deficit poses a challenge to India’s fiscal consolidation target, says Moody’s

Meanwhile, Moody’s expects persistent spending pressures and slower economic growth will result in continued fiscal deficits. At fiscal year-end March 2020, Moody’s projects government deficits to be about 3.7 percent of gross domestic product (GDP) for the central government (slightly wider than the 3.4 percent posted in fiscal 2019) and around 3 percent for states, adding up to a general government deficit of about 6.7 percent.

“As slowing growth and continued infrastructure spending are likely to keep state-level deficits elevated, we expect the central government will continue to face challenges in achieving its fiscal consolidation targets,” Josifov added.

Further, Indian states’ debt burden is also expected to increase to fund significant infrastructure needs. States' gross borrowing needs are budgeted at Rs 7.5 trillion ($104 billion or 3.4 percent of national GDP) for fiscal 2020, a 28 percent increase over fiscal 2019 levels.

Earlier this month, Moody’s cut India’s sovereign credit rating outlook to ‘negative’ from ‘stable’ while affirmed the Baa2 foreign-currency and local-currency long-term issuer ratings for India, the second lowest investment grade score.

It cited “increasing risks that the country’s economic growth will remain materially lower than in the past” and the resultant gradual rise in an already-high debt burden.