Rating agency Moody's has described Budget 2007-08 as 'largely unremarkable', as it disappointed businesses and the market's hope for meaningful economic reforms.
In a research report released today, the rating agency criticised the Budget for supporting an imbalance in policy mix and said the current inflation was a result of above-potential growth of the economy and an ill-defined fiscal policy.
"Addressing inflation with one-off reductions in various indirect taxes and excise duties is not an effective antidote to the underlying inflationary pressures created by above-potential growth and loose fiscal policy," it said.
Moody's also criticised higher focus on monetary policy to correct the inflationary pressure. "The Budget confirms an increasing imbalance in the policy mix, with too great a dependence on monetary policy, including higher interest rates. This could further distort the external accounts, steadily widening the already-large trade deficit by strengthening the exchange rate and attracting more speculative portfolio capital," it said.
According to the rating agency, merely achieving the set fiscal deficit was not enough, as it could aggravate structural inflationary pressures. "Simply meeting the targets set in the Fiscal Responsibility and Budget Management Bill of 2004 is not enough, especially when economic growth has outpaced the expectations on which that legislation was based," Moody's said.
"Not only did policy makers neglect to use the strong revenue situation to curb the fiscal deficit more aggressively, they also missed a chance to incorporate off-budget allocations," the report said.
"As a consequence, the narrowing of the deficit that has taken place in the past few years is not reflected in an equally substantial reduction in the public debt-to-GDP ratio. This leaves government finances more vulnerable to a negative growth shock," it said.