Higher oil prices will likely widen India’s current-account deficit, but this won’t affect the country’s external position.
Higher oil prices along with cuts to consumption tax rates will exert pressure on India’s budget targets, Moody’s Investors Service warned.
“We see risks that the deficit will be wider than budgeted,” Moody’s said in a statement on Wednesday. “However, temporary fiscal slippage, if any, will not offset robust nominal gross domestic product growth and large domestic financing base that will keep the government’s debt burden broadly stable.”
India aims to keep its budget gap at 3.3 per cent of gross domestic product in the fiscal year to March 2019. But elevated oil prices and a run-up to a general election next year have stoked fears that the government might not be able to stick to that target.
India imports a bulk of its oil from overseas, and while the government has allowed fuel retailers to pass on higher prices to consumers, the rise in local rates has lagged the jump in global prices, indicating some of the increases are getting absorbed by the companies.
That apart, the government’s decision last month to slash levies on more than 50 goods will lower revenue by as much as Rs 150 billion ($2.2 billion) each year. It also announced higher assured prices to farmers to buy crops from them.
Late last year, Moody’s raised India’s sovereign rating for the first time since 2004, overlooking a haze of short-term economic uncertainties to bet on the nation’s prospects from a raft of policy changes by Prime Minister Narendra Modi. It upgraded India to Baa2 from Baa3 and said reforms being pushed through by Modi’s government will help stabilize rising levels of debt.
Moody’s said that while higher oil prices will see India’s current-account deficit widen, it will not jeopardize its external position. The rupee has weakened on prospects of a wider current-account deficit, prompting the central bank to raise interest rates twice this year. That is likely to hurt banks’s profitability, Moody’s added.
“Although wider than in the last two years, the current-account deficit will remain significantly narrower than five years ago,” it said. “Moreover, economy-wide external debt is limited and the country’s foreign exchange reserve buffers are ample pointing to low external vulnerability risks.” – Bloomberg