Food bill will hurt India’s credit rating, says Moody’s
31 Aug 2013
The food security bill which passed the test of parliament on Monday will heighten India's macroeconomic problems and hurt government finances, global rating agency Moody's Investors Service warned on Thursday.
It said the bill is credit-negative for the Indian government.
The agency has a Baa3 rating on India with a stable outlook. This is just a notch above the junk grade status.
The Lok Sabha on Monday approved the bill, which seeks to provide subsidised cereals to 75 per cent of the rural population and 50 per cent of the country's urban population.
"The measure is credit negative for the Indian government (Baa3 stable) because it will raise spending on food subsidies to about 1.2 per cent of GDP per year from an estimated 0.8 per cent currently, exacerbating the government's weak finances," Moody's said.
The agency pointed out that India's fiscal deficit is higher than those of its emerging market peers. "Because the bill will take effect only in the last few months of the fiscal that ends March 2014, it will not significantly affect the fiscal 2014 budget. However, it will raise future subsidy expenditure commitments, hindering the government's ability to consolidate its finances," Moody's said.
In addition to the fiscal effect, the government subsidies will contribute to India's already high food inflation. "As we have noted previously, India's fiscal deficits contribute to the current account deficit (the now-infamous CAD) by keeping domestic demand high, thus increasing imports," Moody's said.
While no political party has dared oppose the bill in fear of being labelled anti-poor, many economists have criticised it because of the drain on the exchequer and leaky delivery systems.
Union agriculture minister Sharad Pawar, a senior member of the United Progressive Alliance, has gone on record more than once with his opposition to the bill, saying the government simply cannot afford it.
Observers have also slammed the timing of the bill, which comes less than eight months before a general election is due. It is in fact rather surprising that neither the press nor the Election Commission took much notice of the 'food distribution mela' held by Congress President and UPA chairperson Sonia Gandhi, in Delhi.
In the presence of Delhi Chief Minister Shiela Dikshit, Gandhi distributed free rice packets of 3 kg each to all comers at a popular public venue, perhaps defying the poll panel's regulations on announcing freebies on election eve – which it is almost over-eager to enforce in most other cases.
It said the bill is credit-negative for the Indian government.
The agency has a Baa3 rating on India with a stable outlook. This is just a notch above the junk grade status.
The Lok Sabha on Monday approved the bill, which seeks to provide subsidised cereals to 75 per cent of the rural population and 50 per cent of the country's urban population.
"The measure is credit negative for the Indian government (Baa3 stable) because it will raise spending on food subsidies to about 1.2 per cent of GDP per year from an estimated 0.8 per cent currently, exacerbating the government's weak finances," Moody's said.
The agency pointed out that India's fiscal deficit is higher than those of its emerging market peers. "Because the bill will take effect only in the last few months of the fiscal that ends March 2014, it will not significantly affect the fiscal 2014 budget. However, it will raise future subsidy expenditure commitments, hindering the government's ability to consolidate its finances," Moody's said.
In addition to the fiscal effect, the government subsidies will contribute to India's already high food inflation. "As we have noted previously, India's fiscal deficits contribute to the current account deficit (the now-infamous CAD) by keeping domestic demand high, thus increasing imports," Moody's said.
While no political party has dared oppose the bill in fear of being labelled anti-poor, many economists have criticised it because of the drain on the exchequer and leaky delivery systems.
Union agriculture minister Sharad Pawar, a senior member of the United Progressive Alliance, has gone on record more than once with his opposition to the bill, saying the government simply cannot afford it.
Observers have also slammed the timing of the bill, which comes less than eight months before a general election is due. It is in fact rather surprising that neither the press nor the Election Commission took much notice of the 'food distribution mela' held by Congress President and UPA chairperson Sonia Gandhi, in Delhi.
In the presence of Delhi Chief Minister Shiela Dikshit, Gandhi distributed free rice packets of 3 kg each to all comers at a popular public venue, perhaps defying the poll panel's regulations on announcing freebies on election eve – which it is almost over-eager to enforce in most other cases.