Rating agency Moody’s Investors Service has upgraded India’s sovereign debt ratings denominated in rupee to investment grade from junk. However, many economists have questioned the rationale behind the move, given the deteriorating fiscal consolidation and growth story of the Indian economy. Atsi Sheth, vice-president and senior analyst with Moody’s and one who co-authored the report, tells Dilasha Seth though India’s fiscal deficit is high, its ability to repay debt is helped by the longer term nature of borrowings, against comparable rated economies, and a high private sector savings rate. Edited excerpts:
Economists have criticised Moody’s decision to upgrade India’s sovereign ratings when the fiscal deficit scenario does not look promising. Is that criticism valid?
Moody’s has long noted the Indian government’s finances are a constraint on its rating. India’s fiscal deficits have always been higher than the median for Baa3 (the lowest investment grade) countries, as has its debt to gross domestic product (GDP) ratio. But in assessing the sustainability of this high debt burden, we incorporate the fact that India’s high private sector savings rate is able to absorb the annual debt issuance that high government deficits necessitate. Second, the Indian government’s debt has a longer average maturity structure than that of most Baa3 countries. It means India has to repay or refinance relatively smaller amounts of debt each year than countries that have a shorter debt maturity structure. These two mitigating factors support the Baa3 rating for India, despite its high debt burden.
We have also stressed India’s finances are vulnerable to cyclical ups and downs. The recent deterioration in fiscal deficit is closely linked to a slowdown in growth and a rise in subsidy expenditure due to the rupee’s deterioration. Even so, it should be remembered the fiscal deficit was higher in 2009-10 than it is now, as was the government’s debt-GDP ratio. In fact, the debt- GDP ratio has been declining over the last six years. India’s high growth rate has allowed its debt-GDP ratio to fall from almost 88 per cent in 2005 to about 70 per cent.
Having said that, we reiterate what we have been saying for many years: We view India’s high deficits and debt as a credit weakness, partly mitigated by favourable dynamics of GDP growth, private savings and debt maturity structure.
Critics have also questioned the move in the context of India’s moderating economic growth. How would you answer these critics?
Moody’s ratings are based on a medium-term perspective on a complex range of factors that affect a country’s creditworthiness. Therefore, ratings change when we view that recent economic trends are changing a country’s relative creditworthiness. However, ratings may not change with short-term trends in one or two macro-economic variables, if we view these trends as cyclical rather than structural. India’s Baa3 rating is supported by our view that while India’s economy has slowed in 2011-12, relative to 2010-11, this slowdown is cyclical, and we expect growth to recover sometime in 2012-13, as inflation cools and the monetary policy becomes more accommodative.
The second important characteristic of our ratings is these are based on a global scale. We assess a country’s credit metrics, relative to those of other rated countries, and not just in comparison to that country’s own economic history. Therefore, a decline in India’s GDP growth from 8.5 per cent last year to under seven per cent this year must be viewed against the decline in GDP growth around the world. If compared to global or emerging market growth trends, India’s forecast GDP growth between six and seven per cent is actually quite robust. Over the next three–five years, we expect India’s GDP growth to continue to be higher than the average for Baa3 countries, as it was over the last decade. This expectation is based on India’s high savings and investment rates (which remain higher than the average for Baa3 countries even during this slowdown), and the private sector’s demonstrated ability to adapt to changing circumstances with productivity improvements.
Is it true the finance ministry had meetings with Moody’s representatives to complain about low ratings to India, preceding your move to upgrade India’s ratings. Was the upgrade an outcome of those meetings?
Moody’s regularly meets rated entities to discuss recent developments and credit-related trends. Therefore, Moody’s meetings with Indian officials were in keeping with our practice around the world. We have routinely met finance ministry officials over the past several years. This year’s meetings were in accordance with this routine.
