Budget credit negative, lacks solutions: Moody's

MUMBAI Tue Mar 20, 2012 1:08am IST

1 of 2. An employee counts currency notes at a cash counter inside a bank in Agartala, January 29, 2010.

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MUMBAI (Reuters) - India's budget for 2012/13 lacks new solutions to address its fiscal constraints and is credit negative for the sovereign, ratings agency Moody's Investors Service said, after the government set modest targets to rein in a bloated deficit.

"A dependence on corporate tax revenue and vulnerability to commodity prices and exchange rates weakens the government's credit profile," analysts at Moody's said in a statement on Monday.

"And the fiscal 2012/13 budget's lack of specific policies to address these weaknesses is credit negative."

In the absence of new policy initiatives, it will take a combination of improved economic growth, corporate profitability, lower global commodity prices and exchange rate stability to meet the fiscal deficit target in 2012/13, Moody's said.

"Unless subsidy cuts and fuel price increases are introduced in the next few months, expenditure targets will likely be exceeded yet again in fiscal 2012/13," Moody's said, adding that the budget did not elaborate on measures to cap subsidy spending to 1.7 percent of GDP in the next three years.

Moody's currently has a credit rating of BAA3 on the sovereign with a stable outlook.

India's beleaguered government avoided bold reforms in its annual budget on Friday, opting for cautious steps to shore up growth and unveiling only a smattering of anti-deficit measures including an increase in services and excise taxes.

The government set a fiscal deficit target of 5.1 percent of GDP in 2012/13 fiscal year beginning April.

"The budget proposal to expand the number of services that are taxed will yield new revenue sources, but a meaningful effect on overall revenue ratios will take several years since service taxes contribute only 5 percent of current tax revenues," Moody's said.

(Editing by Aradhana Aravindan)

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