Meeting next year's revenue targets will be challenging: Atsi Sheth

Q&A with Moody's Investors Service vice-president for sovereign risk group

In his interim Budget 2014-15 speech, Finance Minister P Chidambaram had confidently said now, no one was talking about a cut in India’s ratings. Though Atsi Sheth, vice-president (sovereign risk group), Moody’s Investors Service, agrees the outlook on the lowest investment grade on India remains stable, she tells Indivjal Dhasmana tax collection targets for the next financial year are challenging. Edited excerpts:

With Finance Minister P Chidambaram adhering to the fiscal deficit target for 2013-14 and promising a more aggressive target for next year, how confident is Moody’s of retaining India’s ratings?

We had maintained a stable outlook on India’s Baa3 sovereign rating, as we expected to compensate for the lower tax revenue growth, the government would adopt ad hoc measures to meet its fiscal deficit target in 2013-14. Monday’s announcement was in keeping with our expectations, and we maintain a stable outlook on the rating. With regard to the 2014-15 deficit target, we believe growth, commodity prices, exchange rate movements and the policies of the government that takes office later this year will determine whether or not there is continued reduction in the fiscal deficit.

The finance minister said now, rating agencies were no longer talking about a downgrade. Is a downgrade ruled out?

Currently, the rating outlook on India’s Baa3 sovereign rating is stable. In the near term, inflation, interest rates, domestic politics and global financial volatility might affect India’s economic and financial metrics. Through the medium term, we see weak infrastructure, wide fiscal deficits and regulatory uncertainty as key risks to the sovereign credit profile. These risks are balanced by India’s medium-term growth potential, based on its agile private sector, favourable demographics and savings and investment rates, which remain higher than similarly rated countries, despite the downturn.

Many say the tax targets for next financial year are too ambitious.

Given the recent history of growth in tax revenue falling short of Budget targets, it is reasonable to assume GDP growth will have to accelerate significantly and tax buoyancy will have to improve if next year’s revenue targets are to be met. Based on the growth forecasts at this point, we believe meeting these targets will be challenging.

In its recent report, Moody’s said India’s fiscal position is still weak.
Despite the decline in India’s fiscal deficit ratios through the last two years, its general (central and state) government fiscal deficits remain higher than those of similarly rated peers. Wide fiscal deficits increase the government’s debt burden, which is also higher than most similarly rated countries.

This, in turn, requires a significant portion of its limited revenues be channelled towards interest payments, rather than infrastructure or other development spending. In addition, fiscal deficits have macroeconomic costs, as evident in India’s recurrent inflationary and balance-of-payments pressures.

For this financial year, India’s current account deficit (CAD) is officially pegged at $45 billion. Does this provide confidence in the economy?

The narrowing of the CAD was aided by currency depreciation, a growth revival in key export markets and curbs on gold imports. This provides evidence of both policy action and global developments working in support of macroeconomic actions. We expect the same pattern to prevail through the coming quarters, that is, policy actions and global developments will remain important in determining whether India’s macroeconomic balance improves.

For 2013-14, economic growth is projected at sub-five per cent, the second consecutive year. In your report, you said expenditure compression would affect growth further. But tax incentives in manufacturing could revive it.

The expenditure compression is likely to be reflected in the last quarter of this financial year, and while the excise duty cuts might help certain sectors in the current quarter, too, these may be more evident from the first quarter of the next financial year. In the coming quarters, growth revival may depend on inflation-interest rate outcomes, the investment and infrastructure policy outlook and global developments, rather than the fiscal policy.