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In its recent report, Moody’s Investors Service said the Food Security Bill, passed by the Rajya Sabha on Monday, is credit negative.
The rating agency’s vice-president for sovereign risk group Atsi Sheth tells Indivjal Dhasmana that the agency looks for the number of parameters for assigning sovereign ratings, and food Bill is just one among them.
Moody’s has a stable outlook on lowest investment ratings for India. Edited excerpts:
Moody’s has said the food security Bill is credit negative, but it has retained sovereign outlook of India as stable at lowest investment grade. Why this dichotomy?
Our sovereign ratings are an assessment of sovereign creditworthiness on a global scale. The rating takes several factors into account, including but not limited to fiscal and inflation trends. Our views on the food security Bill are an assessment of the impact that a single policy measure will have on fiscal and inflation trends.
The government had said it currently runs targeted public distribution system (TPDS). In 2001 Census, the subsidy on this was Rs 1.9 lakh crore. Now since 2011 Census is available, the subsidy will rise to Rs 1.13 lakh crore. The food Bill will raise it by another Rs 10,000 crore. Then how come your math shows subsidies rising to 1.2% of GDP from 0.8%?
We calculate the subsidy figures based on the government’s Budget and the food security Bill, and these underpin the ratios. (Budget for 2013-14 pegged food subsidy at Rs 90,000 crore and the Bill is expected to increase the outgo to about Rs 1,30,000 crore a year, but not in FY14).
You also said India’s loose fiscal policies have affected its current account deficit (CAD). However, the Centre’s fiscal deficit was reined in at 4.9% of GDP in 2012-13, lower than the 5.7% in the previous financial year. Then how will you explain the record CAD at 4.8% of GDP in 2012-13?
Loose fiscal policy increases domestic demand and fuels inflation. A rise in domestic demand raises demand for imports. And rising inflation raises the cost of exports as well as import-competing products, making both less internationally competitive.
This is how the effect of fiscal policy is transmitted to the external trade and current account deficits. However, this transmission is not necessarily immediate, as the transmission from fiscal policy to domestic demand and inflation can be staggered over several quarters.
Where do you see the rupee value against the dollar in the near future?
We expect the rupee will remain under pressure, given the uncertainty surrounding the tapering of the quantitative easing by the US Federal Reserve, as well as around oil and gold prices due to the geopolitical tensions.
