General govt debt is high, it hasn't changed: Fitch Ratings' McCormack

In the midst of a heated debate between the central government and the Reserve Bank of India, Fitch Ratings retained India’s sovereign rating at BBB-, the lowest investment grade rating last week. Ishan Bakshi speaks to JAMES MCCORMACK, managing director and global head — Sovereign & Supranational Ratings, Fitch Ratings, to understand the rationale for the rating decision as well the ongoing discussions between the government and the RBI

There has been a heated debate between the Reserve Bank of India (RBI) and the government over the past few weeks on several issues. Does that concern you? How do you view this spat?

The ongoing debate doesn’t really give us cause for concern. We see this fairly frequently around the world. Governments or finance ministries have a set of objectives, while central banks have a different set of objectives. And they can debate the appropriate policies that each should be adopting.

We don’t see anything wrong with a healthy policy debate. As long as it doesn’t shake the confidence of investors and has implications for financial markets. We expect to see a little bit more debate and discussion going forward. We are going to see this in other countries as well. For instance, in the US, the president has been openly critical of the Fed.

One possible explanation for the RBI’s line of thinking is that it needs a higher rating in case it has to borrow in times of stress. What is your view?

I think central banks need strong balance sheets. I’m not suggesting that RBI is in this predicament, but what is put at risk with a weak central bank balance sheet is the integrity of the currency itself. So I understand what the RBI is saying — protecting the strength and integrity of the balance sheet is important — we would agree with that.

You have recently affirmed India’s rating. But another rating agency had recently upgraded India. What influenced your rating?

We just affirmed India’s rating at BBB- with a stable outlook. The argument for a stronger rating would be that there is a fundamentally positive growth dynamic, which is unmatched by major emerging markets. But there are some constraints on ratings and from our perspective the primary constraint is the continuing state of public finances. The general government debt is high and it hasn’t really changed over the last several years. You don’t see higher growth translating to an improved fiscal position in terms of general government deficit and debt. We would be more comfortable with a higher rating if we saw a path of government debt that was on a downward trajectory.

This would mean that the burden of lowering general government debt would fall on the Centre.

It matters less to us how you get there. Whether its increased tax revenues or expenditure restraint. In India, the spending needs are real. So GST implementation is quite important because we think the solution lies on the revenue side.

There are some who are concerned about the rise in off balance sheet debt?

That’s always a concern. As we see them, these are contingent liabilities. We do pay attention to them to the extent data allows us to analyse it. But sometimes it is difficult to get a hold of timely and accurate numbers on this.

Some argue that rating agencies have assigned lower ratings to India compared to other emerging markets, despite the former being better placed on some indicators.

We hope we are being fair and balanced. That’s what we owe to governments and investors. We have a model and we make some judgements because countries are too complicated. In the model, we consider four broad categories — macro-economic management, public finances, external finances and structural features such as banking, political issues. And we run it through a model and that gives us an indicative rating. We then take that to a committee and think about what we are missing. In case of India, the rating that comes out is BBB-. So we are not making any upward or downward adjustment.

Banking has been a major area of concern over the past few years. What are your views?

The banking sector in India has been an issue for us for some time from a sovereign rating perspective for a few reasons. First, we tend to think of the banking sector as a contingent liability to the sovereign. Second, are the banks in good shape to able to fund the growth which we are projecting? Recent events bring these issues into focus. Although we haven’t moved the rating based on that, it is a constraint on growth.