In the midst of the debate that an additional Rs 500 billion borrowing by the Centre would widen its fiscal deficit, Moody’s Investors Service Vice-President (Sovereign Risk Group) William Foster tells Indivjal Dhasmana that the government’s plan to mop up more funds had been reckoned on in the rating agency’s assessment of the country when it upgraded its grade by a notch. Edited excerpts:
You recently upgraded India's sovereign rating by a notch. How will it be affected by the government's announcement of an additional borrowing of Rs 500 billion?
The government’s additional borrowing has been reflected in our forecast of a general government Budget deficit, which combines the central and state government deficits, of 6.5 per cent of GDP this fiscal year (ending in March). The sovereign ratings upgrade had been driven by our assessment that a number of reforms will combine to enhance India's structural credit strengths, including its strong growth potential, improving global competitiveness, and its large and stable financing base for government debt. It will take time for the impact of most of the measures to be seen. Some, such as the goods and services tax (GST) and demonetisation, have temporarily impacted growth. However, as disruption fades, we expect to see a rebound in real and nominal GDP growth to sustained higher levels. In turn, sustained high nominal GDP growth will likely contribute to a gradual decline in the general government debt-to-GDP ratio from about 69 per cent this fiscal year, a key credit constraint, over the medium term.
How much flexibility will you give the Union government to deviate from its fiscal deficit target this financial year and the next in order to retain the ratings at the present level?
As noted, we had forecast a general government Budget deficit of 6.5 per cent of GDP this fiscal year. Government revenues lower than planned in the Budget and somewhat higher government spending could lead to a deficit wider than targeted, which we captured in our forecast. However, we believe the government’s commitment to fiscal consolidation remains. Over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a narrowing of the deficit. Together with robust and sustained nominal GDP growth, this should help to contribute to a gradual decline in the government debt burden over the medium term.
What focus do you want to see in the Budget in terms of rating profile?
We will await the Budget announcement before commenting. However, the commitment to fiscal deficit reduction and medium-term fiscal consolidation, along with economic reforms and public spending that drives sustained increased investment, would provide support to India’s credit profile.
Why do you think that reforms in India may lose steam in 2018 and 2019 ahead of the parliamentary elections? If this happens, will it have an impact on the sovereign rating?
Our view of India’s sovereign rating focuses on the expected positive impact of reforms that have been implemented to date, along with continued progress on economic and institutional reforms over the medium term.
The advance estimates by the Central Statistics Office show economic growth will clock a four-year low of 6.5 per cent in the current financial year. It's less than what was projected by the Economic Survey in the range of 6.75-7.5 per cent. Also, estimated GVA growth at 6.1 per cent is less than the 6.7 per cent projected by RBI. Is it a matter of worry so far as the ratings are concerned?
In the near term, our GDP growth forecast takes into account the immediate impact of demonetisation and temporary disruptions related to GST. We forecast real GDP growth to moderate to 6.7 per cent this fiscal year. However, as disruption fades, assisted by recent government measures to support small and medium enterprises and exporters with GST compliance, we expect to see a rebound in real GDP growth to 7.5 per cent next fiscal year, with similarly robust levels of growth thereafter.
What are the chances of another rating upgrade?
The rating could face upward pressure if there were to be a material strengthening in fiscal metrics, combined with a strong and durable recovery of the investment cycle. In particular, greater expectations of a sizeable and sustained reduction in the general government debt burden would put positive pressure on the rating. Implementing key pending reforms, including land and labour reforms, could put additional upward pressure on the rating.
The outlook on India's rating is stable. When can we see it changing to positive?
The stable outlook reflects Moody’s’ view that, at Baa2 level, the risks to India's credit profile are broadly balanced. India’s relatively fast pace of growth in incomes will continue to bolster the economy’s shock absorption capacity. However, India's high public debt burden remains an important constraint to its credit profile relative to peers. Measures to encourage greater formalisation of the economy, reduce expenditure, and increase revenues will likely take time to diminish the debt stock.