Moody's points to fiscal, inflation worries

Fin Min tries to reassure, seeks rating upgrade

Moody’s Investors Service has expressed concern at the central government’s fiscal situation and the inflationary conditions in India. They did so at the finance ministry presentation on Monday of its case for a rating upgrade. Moody’s has India at the lowest investment category at present.

The ministry sought to allay the rating agency’s concerns and said economic growth was on an upward swing. “They (Moody’s) have concerns about the fiscal deficit. We explained that we will be able to maintain the target,” Finance Secretary Arvind Mayaram told reporters after the meeting.

The Centre’s fiscal deficit is projected to come down to 4.1 per cent of gross domestic product (GDP) in the current financial year against 4.6 per cent in the previous one. The deficit was over 10 per cent of GDP in the first quarter, over 60 per cent of the year’s budget estimate in only four months. However, the government is confident that as the year progresses, more revenue will be collected, bringing down the deficit.

Moody’s has repeatedly stated it is more concerned about the medium-term plan for the fiscal deficit and not only this year’s target.

The finance ministry has already committed to reining in the fiscal deficit at three per cent of GDP by 2016-17.

Mayaram said the government had set up an Expenditure Management Commission, which would look at broad contours of subsidy rationalisation.

Headed by former Reserve Bank governor Bimal Jalan, the Commission is required to given an interim report before the Budget for 2015-16 and the final report in early 2016.

Moody’s has assigned a “Baa3” rating on India, the lowest investment grade. The rating has a stable outlook. Moody's did not respond to a query on whether it would upgrade India’s rating or outlook or retain these.

“We presented our case. The growth is coming back. The budget has strong growth impulses and the response of the economy is positive,” said Mayaram.

He further said revenue buoyancy was good and the International Monetary Fund (IMF) and the World Bank were optimistic about our growth prospects. The World Bank projected India’s economic growth at 5.5 per cent for the current financial year and IMF pegged at 5.4 per cent. The finance ministry expects the economy to grow by 5.8 per cent this financial year. It was below five per cent in each of the previous two years. However, it expanded by a two-year high of 5.7 per cent in the first quarter of the current financial year.

Moody’s had earlier said its rating “reflects high domestic savings and adequate foreign exchange reserves and the challenges posed by large fiscal deficits, recurrent inflation and weak infrastructure”.

Mayaram said inflation was also a concern for Moody’s. “We told them we are taking care of the requirements, we have adequate stock, so that if monsoon is below normal and if production is marginally down, then our stocks are adequate to take care of contingency. We will be able to manage it.”

Wholesale price inflation declined to 5.19 per cent in August from 5.43 per cent in July but consumer price inflation rose to 7.96 per cent from 7.46 per cent. Even then, the retail price inflation was below the eight per cent target set by the Reserve Bank of India for January 2015. A sub-normal monsoon might raise it, though.

Representatives of another rating agency, Standard & Poor’s, had met finance ministry officials on August 12. It is learnt their team was worried that the Budget estimate of 20 per cent growth in tax collection would be difficult to meet.

The direct tax collection target for 2014-15 has been fixed 15 per cent higher at Rs 7.36 lakh crore. The growth in 2013-14 was 14 per cent. Indirect tax collections are expected to increase 26 per cent to Rs 6.24 lakh crore, against only 4.6 per cent the previous year. The target appears very high to analysts but the finance ministry is pinning its hopes on 5.8 per cent GDP growth this year.

Two more agencies, Fitch and JCRA (of Japan), are yet to meet the finance ministry’s officials. All major rating agencies have assigned India the lowest investment grade.