'Fitch to look at fiscal consolidation, business environment for upgrade'

Interview with Thomas Rookmaaker, director, Asia Pacific Sovereign Ratings at Fitch

Fitch Ratings retained India's outlook at stable as well as rating at the lowest investment grade on April 9, while the very same day Moody's upgraded the outlook.

Thomas Rookmaaker, director, Asia Pacific Sovereign Ratings at Fitch, tells Indivjal Dhasmana that this does not confuse investors. Rookmaaker also explains why Fitch has doubts over new GDP numbers. Edited excerpts:

Fitch has retained India's outlook as well as rating, but Moody's upgraded the outlook. Don't you think, such different moves by the two rating agencies send confusing signals to markets and investors?

I do not have any indications that investors find it difficult to understand the reasons for our decision to affirm the 'BBB-' rating and stable outlook last week.

 

What are the chances that Fitch will also upgrade India's outlook? Is there any chance of rating upgrade in the next 12-18 months?

The outlook is stable, which means that the chance of an upgrade is the same as the chance of a downgrade. For a positive rating action, we would be looking at two issues specifically: Fiscal consolidation or fiscal reforms that would cause the general government debt burden to fall more rapidly than expected; and an improved business environment, resulting from implemented reforms and structurally lower inflation levels, which would support higher investment and real GDP growth.

You said deviation from fiscal consolidation path could lead to negative repercussions on the stable outlook. This year's Budget had deferred the path by a year, will it affect the outlook?

When we affirmed the ratings and stable outlook last week, we took the policy measures in the Budget into account, including the decision to kick out the 3 per cent target for the central government by one year. The lack of a more ambitious deficit reduction path means that India's already high debt burden will continue to be a rating and credit weakness in the coming years.

Why does Fitch say new methodology on GDP captures much more economic activities than is actually taking place? What are your doubts?

Like other economists, including government officials, we find it difficult to understand official growth levels of 6.9 per cent for FY'14 and 7.4 per cent for FY'15, as this seems difficult to reconcile with indicators and anecdotal evidence that show low investment levels, and weak corporate and bank balance sheets. We agree, for instance, with the statements in the latest Economic Survey that the FY14 growth data are puzzling and that the data warrant further reflection. But taking the revised data as given, we would expect an uptick in growth in the coming years as a result of the implementation of the structural reform agenda, as well as monetary easing by the RBI for instance.

Do you find any perceptible difference between the new government and the previous one which suggest things are improving?

When this government received its strong mandate from the electorate in the Lok Sabha in May last year, political uncertainty was reduced substantially. This government has a strong drive to implement structural reforms and that should lead to improvements in the business environment. Translation of the reforms into higher real GDP growth will depend on actual implementation.

Are you suggesting that the government should reduce the rate of increase in minimum support price when you say that it along with RBI's monetary stance would impact meeting of the target of inflation?

The limited hikes in the minimum support prices have helped to keep inflation down, just like the RBI's monetary policy following its CPI glide path. Since food price developments have a strong impact on consumer price inflation, government policies related to food prices will continue to affect inflation. Meeting a headline inflation target in India seems inherently challenging for the RBI since external factors determine inflation in India to a large extent, such as rainfall during the monsoon season and agricultural policies. Nonetheless, the new monetary policy framework bodes well for structurally lower inflation.