According to de Guzman, the upcoming elections will make it difficult for the government to undertake any meaningful tax reform.
India's gross domestic product (GDP) growth is seen declining to 5.6 percent in 2023-24, although it will still be one of the best performing large economies in the G-20, said Christian de Guzman - senior vice president at Moody's Investors Service and primary analyst for India.
"This real growth forecast is still amongst the healthiest in the entire G-20. And we think potential growth can be sustained around 6 percent," de Guzman told Moneycontrol in an interview.
A GDP growth rate of 5.6 percent would be well below the government's first advance estimate of 7 percent for this year and the Reserve Bank of India's (RBI) forecast of 6.5 percent for next year.
According to the International Monetary Fund's latest forecast, the G-20 club of countries is seen growing 2.5 percent in 2023.
The Indian government has pushed the pedal on its capital expenditure to raise the economy's current and potential growth rate, with economists predicting the upcoming Union Budget could announce a capex target of around Rs 9 lakh crore for 2023-24. But while government capex has risen sharply, the private investment cycle remains subdued.
This does not, however, worry de Guzman, who said the private sector's weakness had now receded.
"In the past year, the private sector has started to emerge from the deleveraging process and that's reflected primarily in the very health rate of credit growth. This suggests private capex has some room to run," he said.
Further impetus could come from any shift in production to India from China by global companies.
"Some of that investment will find its way into India. There's already anecdotal evidence of that. So we can't count out private capex as an engine of growth."
Like real growth, India’s nominal growth is also expected to decline next year, thanks to cooling inflation.
Moody's sees nominal growth falling to 10.9 percent in 2023-24, sharply lower than 19.5 percent in 2021-22 and 15.4 percent this year.
A favourable base-effect that fuelled high nominal growth over the last two years has been crucial in lowering India's debt ratios, with public debt at the combined central and state level declining to around 85 percent of GDP from just under 90 percent of GDP in 2020-21.
As such, the Union Budget for 2023-24, set to be presented on February 1, will be keenly eyed for the extent of fiscal consolidation the Centre announces, with this year's fiscal deficit target of 6.4 percent of GDP expected to be met.
But while de Guzman refused to say what would be an appropriate fiscal deficit target for next year – "we don't give policy advice" – he doesn't think the medium-term target of 4.5 percent will be reached by 2025-26.
"...to get to the 4.5 percent target will require a combination of both, spending reduction and reforms to increase revenue. We are sceptical when it comes to expenditure reduction, especially in light of the commitments and pressures, but also the political calendar, which I think precludes any meaningful revenue reform," de Guzman said.
"In any vibrant democracy, it really is very hard to raise taxes in an election year," he added.
India's general elections will be held in the first half of 2024, making the 2023-24 Budget the last full budget before the country goes to the polls. Before that, in 2023, several states including Karnataka, Rajasthan and Telangana, will conduct assembly elections.
As such, while de Guzman said India has consolidated its finances to a degree and the government continues to appear committed to the 4.5 percent target, it will be difficult to meet it partly because there is "no clear articulation" of how it will be done, something which has been echoed by other ratings agencies too.
The government's current focus is on boosting the manufacturing sector, with hopes pinned on the Production-Linked Incentive (PLI) scheme for various sectors.
While de Guzman lauded the government's effort to push high-end manufacturing in areas such as semi-conductors and electronics, he said structural reforms were needed to promote greater investment in low value added manufacturing activities that are labour intensive.
"...(high-tech industries) simply do not generate enough employment to make very significant jumps in diversifying the economy or the labour market away from agricultural employment or even making really substantial jumps in GDP per capita," de Guzman said.
Some of these reforms don't necessarily require the government to spend - which it is set to do so to the tune of several lakhs of crores rupees under the PLI scheme - but easing of regulations and opening the economy to greater investment.
Citing the decision to not become a part of the Regional Comprehensive Economic Partnership, or RCEP, as an example, de Guzman said the move undermined India's efforts to increase its involvement in global supply chains.
"Yes, India already has a free trade agreement with ASEAN (Association of Southeast Asian Nations) as well as other bilateral deals with individual countries in ASEAN. But the messaging doesn't help – when you say you want to be plugged into and gain better access into the supply chain, but you're not willing to make the effort at opening up your market. Market access is two ways."
For much of the last decade, India has aggressively pursued an upgrade in its sovereign rating. Moody's, which currently rates India at Baa3 with a stable outlook, had delivered such an upgrade to Baa2 in November 2017, only to announce a downgrade back to Baa3 early in the pandemic.
The opinion in New Delhi, however, remains that India's sovereign rating does not reflect its fundamentals. In fact, the Economic Survey for 2020-21, tabled in Parliament in early 2021, devoted an entire chapter (PDF) on the subject. In the Survey, the government argued that sovereign credit ratings were biased against emerging giants such as India and China.
When asked whether India's criticism of its rating was fair, de Guzman said it was not for him to adjudicate on the matter.
"But just to note, when we look at debt repayment, the sheer amount of resources dedicated to debt servicing is pretty large in the case of India. So I don't think the government can really deny that," he added.
As per Moody's calculations, the central and state governments use about 27 percent of their revenue to pay interest on their debt. In comparison, the percentage for higher-rated economies is 5 percent or less, giving them the room to spend on other heads.
"…having more than a quarter of your revenue base devoted to just debt servicing precludes greater spending or greater fiscal flexibility on things that could further improve growth, such as increases in capital expenditure," de Guzman said.
