India's Farming Reforms Key to Cutting Fiscal Deficit: Moody's

New Delhi: Improvement in India's sovereign rating will depend on the government's ability to pursue farm sector reforms as they have a bearing on inflation and fiscal deficit, Moody's said on Thursday.

"We expect (farm sector reforms)... will improve the efficiency of India's food supply chain, a credit positive because it will reduce inflationary pressures and the government's fiscal deficit, two key constraints on the sovereign's credit quality," Moody's said in its Credit Outlook report.

Moody's assigned a 'Baa3' rating with stable outlook on India.

The Expenditure Management Commission, headed by Bimal Jalan, has recently submitted its interim report to Finance Minister Arun Jaitley. The minister is likely to incorporate the suggestions in the Budget to be tabled in the Lok Sabha on February 28.

The reforms which seek to reduce the fiscal deficit to 3.6 per cent in 2015-16 would include decentralising grain procurement, a process for disposing of excess food grains, delivering food and fertiliser subsidies via direct cash transfers, Moody's said.

The exact reduction in subsidy costs will depend on the measures that the government eventually adopts, it said, adding that would help narrow the fiscal deficit.

According to Moody's, annual spending on food subsidies grew by 20 per cent on average over the past eight years, compared with 16 per cent overall expenditure growth during the same period. The central government spent about 0.88 per cent of GDP on food subsidies in fiscal year 2014, which accounted for 18 per cent of its fiscal deficit.

The central government recognises that the level and volatility of food prices poses risks to its fiscal target of reducing the fiscal deficit.

"...food subsidy reform is likely to remain part of its fiscal consolidation strategy. And the government, as it has done with other policy reforms in recent months, is likely to administer changes in food policy and process that do not require legislative amendments," Moody's said.