 "At this time, we can't forecast a significantly lower CAD: Atsi Sheth")
In its recent analysis, Moody's Investors Service has pegged India's current account deficit (CAD) at high 4.6 per cent of the gross domestic product in 2013-14, while most other analysts expect it to be lower than 3.7 per cent. Atsi Sheth, Moody's vice-president for Sovereign Risk Group, tells Indivjal Dhasmana the rating agency's calculation was based on India's CAD at 4.9 per cent in the first quarter of FY14. Seth says the outlook on India's lowest investment rating is still stable. Excerpts:
Our government is confident of reining in CAD at $70 billion for 2013-14, which would constitute around 3.7 per cent of the GDP. Analysts predict CAD may come down even lower than this, even as it was significantly high at 4.9 per cent in the first quarter of 2013-14. Why do you peg CAD at high level of 4.6 per cent of the GDP in 2013?
As you mentioned, CAD for the first quarter of this year is estimated at around 4.9 per cent of the GDP. We have incorporated this data in formulating our full fiscal year forecast of CAD at 4.6 per cent of GDP. We see a modest narrowing in CAD as export growth improves, compared to the last financial year and import growth decelerates as curbs on gold imports and rupee depreciation take effect. However, global export demand recovery is still subdued and subject to growth risks, which may cap the extent to which Indian exports can grow. Secondly, global oil prices play a significant role in India’s import bill, and these are not forecast to decline dramatically over this financial year.
Therefore, we do not see, at this time, the reason to forecast a significantly lower CAD. Moreover, the ratio you quote is the deficit as a percentage of the GDP, and since GDP growth is likely to be lower this financial year compared to last year, that too affects the CAD-GDP ratio.
Your analysis also expected economic growth to be subdued through the rest of 2013-14 after the first quarter growth crashed to a four-year low of 4.4 per cent. According to the government, growth will pick up from the second half and the second quarter will yield higher growth than the first. Do you find the government's views on growth a bit too optimistic?
Our forecast of 4.5 per cent GDP growth is based on our assessment that high domestic inflation and interest rates will limit domestic investment and consumption growth this year. We also note that if the government is to meet its fiscal deficit targets, it will likely do so by curtailing expenditures (indeed, some cuts have already been announced) and this will also dampen growth. Our forecasts incorporate the effect that a good monsoon will have on agricultural output. We have noted there could be further growth acceleration if a good harvest lowers food inflation and spurs consumption more than is currently forecast. Whether that will actually occur will only be revealed in data later this year. At this point, we believe our 4.5 per cent growth forecasts incorporate the balance of risks to economic growth.
The government has taken a slew of measures to spur investments, but your analysis said underlying data showed continued subdued investment growth. Why is it so?
The measures the government has announced affect medium-term investment plans and so will likely take some time to crystallise into actual implementation, which can be captured by data. In the near-term, the reasons for subdued investment growth are: a) uncertainty regarding the global growth outlook keeping export related investments low; b) high domestic interest rates; c) subdued consumption growth; d) high headline inflation, including high prices of commodity inputs; and, e) policy uncertainty at the Central-government level, which is further heightened by anticipation of national elections next year. So until some of these conditions are alleviated, investment sentiment and implementation is likely to remain subdued.
Your analysis also said slower growth and higher subsidy expenditures pose risks to the government’s deficit targets. The government’s target is to cut fiscal deficit to 4.8 per cent of the GDP in the current financial year. Is this feasible?
We believe meeting the government’s fiscal deficit target this year will be challenging given that lower than anticipated GDP growth will dampen tax revenue growth, while high inflation and exchange rate depreciation will raise government expenditures. The actual deficit will depend on the extent to which the government can cut expenditures as well as on growth trends during the rest of the year, and their impact on revenues.
Is there any possibility of movement in your sovereign rating to India or outlook to the rating?
We are continually monitoring macro-economic and policy trends in all the countries we rate. We compare trends in individual countries to those in similarly rated peers globally to assess whether current and forecast metrics for a country are keeping in with its ratings. We consider changes to ratings and outlooks when we believe a country’s sovereign credit trends are likely to fall outside the range for its rating category.
The outlook on India’s sovereign rating is stable. Negative pressure on the rating and outlook could be triggered by a continued, material increase in government debt ratios and government contingent liabilities, an enduring loss of international competitiveness or an anticipated worsening of the balance of payments.
On the other hand, positive rating momentum could come from a significant and sustained fall in fiscal deficit and government debt ratios, as well as a decline in their vulnerability to growth and political cycles.
Our government is confident of reining in CAD at $70 billion for 2013-14, which would constitute around 3.7 per cent of the GDP. Analysts predict CAD may come down even lower than this, even as it was significantly high at 4.9 per cent in the first quarter of 2013-14. Why do you peg CAD at high level of 4.6 per cent of the GDP in 2013?
As you mentioned, CAD for the first quarter of this year is estimated at around 4.9 per cent of the GDP. We have incorporated this data in formulating our full fiscal year forecast of CAD at 4.6 per cent of GDP. We see a modest narrowing in CAD as export growth improves, compared to the last financial year and import growth decelerates as curbs on gold imports and rupee depreciation take effect. However, global export demand recovery is still subdued and subject to growth risks, which may cap the extent to which Indian exports can grow. Secondly, global oil prices play a significant role in India’s import bill, and these are not forecast to decline dramatically over this financial year.
Therefore, we do not see, at this time, the reason to forecast a significantly lower CAD. Moreover, the ratio you quote is the deficit as a percentage of the GDP, and since GDP growth is likely to be lower this financial year compared to last year, that too affects the CAD-GDP ratio.
Your analysis also expected economic growth to be subdued through the rest of 2013-14 after the first quarter growth crashed to a four-year low of 4.4 per cent. According to the government, growth will pick up from the second half and the second quarter will yield higher growth than the first. Do you find the government's views on growth a bit too optimistic?
Our forecast of 4.5 per cent GDP growth is based on our assessment that high domestic inflation and interest rates will limit domestic investment and consumption growth this year. We also note that if the government is to meet its fiscal deficit targets, it will likely do so by curtailing expenditures (indeed, some cuts have already been announced) and this will also dampen growth. Our forecasts incorporate the effect that a good monsoon will have on agricultural output. We have noted there could be further growth acceleration if a good harvest lowers food inflation and spurs consumption more than is currently forecast. Whether that will actually occur will only be revealed in data later this year. At this point, we believe our 4.5 per cent growth forecasts incorporate the balance of risks to economic growth.
The government has taken a slew of measures to spur investments, but your analysis said underlying data showed continued subdued investment growth. Why is it so?
The measures the government has announced affect medium-term investment plans and so will likely take some time to crystallise into actual implementation, which can be captured by data. In the near-term, the reasons for subdued investment growth are: a) uncertainty regarding the global growth outlook keeping export related investments low; b) high domestic interest rates; c) subdued consumption growth; d) high headline inflation, including high prices of commodity inputs; and, e) policy uncertainty at the Central-government level, which is further heightened by anticipation of national elections next year. So until some of these conditions are alleviated, investment sentiment and implementation is likely to remain subdued.
Your analysis also said slower growth and higher subsidy expenditures pose risks to the government’s deficit targets. The government’s target is to cut fiscal deficit to 4.8 per cent of the GDP in the current financial year. Is this feasible?
We believe meeting the government’s fiscal deficit target this year will be challenging given that lower than anticipated GDP growth will dampen tax revenue growth, while high inflation and exchange rate depreciation will raise government expenditures. The actual deficit will depend on the extent to which the government can cut expenditures as well as on growth trends during the rest of the year, and their impact on revenues.
Is there any possibility of movement in your sovereign rating to India or outlook to the rating?
We are continually monitoring macro-economic and policy trends in all the countries we rate. We compare trends in individual countries to those in similarly rated peers globally to assess whether current and forecast metrics for a country are keeping in with its ratings. We consider changes to ratings and outlooks when we believe a country’s sovereign credit trends are likely to fall outside the range for its rating category.
The outlook on India’s sovereign rating is stable. Negative pressure on the rating and outlook could be triggered by a continued, material increase in government debt ratios and government contingent liabilities, an enduring loss of international competitiveness or an anticipated worsening of the balance of payments.
On the other hand, positive rating momentum could come from a significant and sustained fall in fiscal deficit and government debt ratios, as well as a decline in their vulnerability to growth and political cycles.