The finance ministry was eagerly looking for rating upgrades for India. However, to its disappointment, Fitch has retained its rating for the country at the lowest investment grade. Thomas Rookmaaker, Director, Sovereign Ratings, Fitch Ratings, tells Indivjal Dhasmana that though India has improved its position in the World Bank’s Ease of Doing Business ranking by 30 notches in 2017 to reach the 100th position, its position is still lower than similarly rated economies. Edited excerpts:
Fitch attributed its decision to retain India's sovereign ratings to its weak fiscal health. Though there is fiscal slippage, the government has accepted the recommendations of the N K Singh panel for a glide path on fiscal consolidation. Does this not give comfort to Fitch?
Parliament's adoption of a ceiling of 60% of GDP for general government debt and that of 40% for central government debt to be reached by FY25 is a positive step towards a more prudent fiscal framework, given it is eventually adhered to. In the end, implementation is what counts and implementation of the FRBM Act has been quite difficult over the past 10 years. Moreover, fiscal plans can change. To illustrate, this government's initial fiscal plan, set out in 2014, was to reduce its deficit to 3% of GDP by March 2018. In the medium-term fiscal framework, this target has now been pushed to FY21, well beyond this government’s term. Weak fiscal balances, the Achilles' heel of India's credit profile, continue to constrain its ratings. Fitch expects a general government debt of 69% of GDP in FY18 (median among peer rated economies is 41% of GDP) and a general government deficit of 7.1% of GDP (median among peer rated economies is: 2.1%).
The rating agency also said there are governance issues. Are you talking about government's governance issues or corporate governance issues?
We use the World Bank’s Governance Indicator in our sovereign rating model. This indicator incorporates several sub-categories relating to both government and corporate governance standards, including control of corruption, rule of law and regulatory quality.
Your analysis talked about a difficult business environment, but India's ease of doing business ranking improved by 30 notches, being placed at the 100th rank in 2017. Is that not enough?
India’s rise by 30 places in the World Bank's Ease of Doing Business ranking is positive, although its current ranking is still low compared to peers. Being 100th out of 190 countries, India ranks below the medians of both those rated at the same grade as India (‘BBB’ category) or a category lower (‘BB’).
The finance ministry batted for an upgrade. Were its arguments not considered in the report?
Our meeting with the finance ministry was highly informative. For all countries that we rate, we highlight both their strengths and weaknesses with respect to those of their peers. India's rating balances a strong medium-term growth outlook and favourable external balances with weak fiscal finances and some lagging structural factors, including governance standards and a still-difficult, but an improving business environment.
Which factors can affect a rating upgrade?
The main factors that, individually or collectively, could trigger positive rating action are: a reduction in general government debt over the medium term to a level closer to that of rated peers; higher sustained investment and growth rates without the creation of macro imbalances, such as from successful structural reform implementation.
What can lead to India getting the junk grade?
The main factors that could trigger negative rating action are: a rise in the public-debt burden, which may be caused by stalling fiscal consolidation or greater-than-Fitch-expected deterioration in the balance sheets of public-sector banks that could prompt large-scale sovereign financial support; loose macroeconomic policy settings that cause a return of persistently high inflation and a widening current-account deficit, which would increase the risk of external funding stress.