While Standard & Poor’s (S&P) lowered its outlook on India’s ratings from stable to negative, owing to concern on fiscal consolidation, reforms and external conditions, Moody’s Investors Service retained its stable outlook. Moody’s Vice-President (sovereign risk group) Atsi Sheth tells Dilasha Seth India’s credit parameters are on a par with other countries that have Baa3 ratings (lowest in investment grade). Edited excerpts:
Moody’s has retained India’s outlook at stable. However, it said government finances were the weakest aspect of the country’s macroeconomic profile. Is there a possibility of a rating or outlook cut soon?
As we had pointed out earlier, the Indian government’s propensity for high fiscal deficits is a long-standing credit weakness that is exacerbated during times of lower growth and high commodity prices. This propensity is factored into our ratings. We also factor in two characteristics that support the sovereign credit profile: India’s high domestic savings rate and the long average maturity profile of government debt.
While India’s GDP (gross domestic product) growth, as well as its balance of payments position have both deteriorated in recent months, when viewed from a global perspective, it is clear these trends are not unique to India. These have been witnessed elsewhere as well. As the stable outlook on India’s rating suggests, in assessing past, current and future trends in India’s credit strengths and weaknesses, we find India’s overall forecast credit metrics remain within the range compatible with those of other countries rated Baa3.
What are your projections for India in 2012-13, given reforms are not moving forward? Do you see a revival of the economy in the next two years, that is, before the 2014 elections?
Assuming a normal monsoon, stabilising domestic inflation and a gradual global recovery, GDP growth could return to seven per cent levels. However, a return to levels above eight per cent requires policy action to ease supply constraints and buoy investor sentiment, as well as a sustainably benign environment of moderating capital costs.
Do you see the government’s fiscal deficit coming down to 5.1 per cent of the GDP this financial year, as projected in the Budget? Also, do you think the current account deficit would be reined in at three per cent, as projected by the Prime Minister’s Economic Advisory Council?
We believe it would be difficult to meet the deficit target without a reduction in subsidy spending, which would require a revision in fuel prices. In addition, meeting the deficit target would be helped by a recovery in corporate profit growth, since corporate taxes are an important component of government revenue.
Trends in the current account deficit would be determined by the direction of global oil prices, which would affect the import bill, and global growth, which would affect export growth. In the near term, the current account deficit would remain above three per cent of the GDP. But the ratio could fall as global and domestic growth recovers. It could also decline if oil prices do not rise significantly.
You had upgraded India’s government bonds (denominated in rupee) ratings to Baa3 a few months earlier. Are you reconsidering that, given the share of India’s short-term debt to the total debt has risen to 43 per cent and the government’s foreign currency reserves are declining?
Note that external debt with original maturity periods of less than one year is about 20 per cent of the total external debt. The 43 per cent figure includes long-term debt and deposit obligations due over the next year. Even with the decline in reserves, official foreign exchange reserves are adequate to cover the country’s short-term, as well as the currently maturing long-term foreign currency debt and deposit obligations over the next year.