By Siddhi Nayak
MUMBAI (Reuters) -India’s decision on Saturday to ease the tax burden for middle-class consumers may not have a large impact on growth, Moody’s Ratings said in response to the budget, retaining their growth forecast for the South Asian economy at 6.6% for next fiscal year.
It remains “unclear” whether the Indian government has done enough to boost economic growth by undertaking tax measures, Christian de Guzman, senior vice president and lead sovereign analyst for India said in an interview.
“I think it really depends on whether consumers do actually spend that money that is freed up from these tax measures… I would place some uncertainty there.”
India’s budget said that people earning up to 1.28 million rupees ($14,800) per year will not have to pay any taxes, raising the threshold from 700,000 rupees. The government also cut tax rates for people earning above the new threshold.
Guzman said that capital expenditure for infrastructure development provides a “long-lasting” boost to growth compared with tax cuts that may have short-term benefits.
While the trend of the government reducing its fiscal deficit remains intact, the resulting impact on debt metrics is still narrow, he said.
“That slower pace of fiscal consolidation is not going to be material enough to change our view on (India’s) rating at the moment,” he said.
In August 2023, Moody’s affirmed its lowest investment grade rating of ‘Baa3’ for India, with a stable outlook.
A rating upgrade is important as it can lower borrowing costs, attract foreign investment, and boost economic credibility.
The brunt of fiscal consolidation has been borne by expenditure reduction and will need to be complemented by increased revenue generation to make fiscal consolidation more sustainable over the longer-term, Guzman said.
As it moves away from targeting fiscal deficit, the government aims to now bring down its debt-to-GDP ratio to around 50% by March 2031.
Guzman said the 2031 target may not be achievable since it would need a “material” increase in revenue generation.
For Moody’s to consider a rating upgrade for India, the country’s public debt needs to decline materially, he said.
(Reporting by Siddhi Nayak; Editing by Eileen Soreng and Mrigank Dhaniwala)
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