No change in India's rating in 12-18 months: Atsi Sheth

Interview with Vice-president, Moody's Investors Service

As India raised its pitch for upgrade of ratings from the current lowest investment grade, Atsi Sheth, vice-president and senior analyst, sovereign risk group, Moody’s Investors Service, tells Indivjal Dhasmana that she does not foresee any movement from the current grade in the next 12-18 months. She will take part in seminars during Asian Development Bank’s ongoing annual general meeting from Friday. Edited excerpts:

Do you find merit in India’s demand that rating agencies should upgrade its rating in the light of the reforms on the FDI front and initiatives to bring down fiscal deficit?
Based on several decades of India’s economic and policy history, we expect policies to change slowly in general, with occasional periods and pockets of accelerated implementation. What we are seeing at this juncture is an acceleration in policy implementation in some areas, but continued uncertainty in others. This is in line with our expectation. Therefore, and as indicated by our stable outlook, we do not anticipate an upward or downward change in India’s Baa3 (the lowest investment grade) rating over the next 12-18 months.

Why has Moody’s retained India’s outlook as stable, unlike its two peers —Standard & Poor’s and Fitch —which have lowered it?

Let me address the factors that underpin Moody’s rating outlook. We would change our rating outlook if economic or policy trends in a country differed meaningfully from what we had foreseen.

We also recognised India’s GDP growth rate was markedly lower in FY13 than in previous years. However, this slowdown was not different from what occurred elsewhere in the world. In fact, even during the slowdown, India’s growth rate remained above that in most similarly rated peers. India’s rating reflects its credit profile on a global scale - that is, based on an analysis of credit metrics vis-à-vis other countries, rather than against India’s own history alone. Lastly, we did not believe that the slowdown in India is irreversible.

We expect a growth recovery to proceed slowly over the next several quarters if global conditions and the monsoon do not add another shock.

India’s current account deficit breached all records to stand at 6.7 per cent of GDP in the third quarter of FY13. Does it come in the way of upgrade of India’s ratings? What is your outlook on CAD in India?
India’s current account deficit (CAD) has widened significantly from a 1 per cent average in the first half of the last decade to the 5-6 per cent of GDP levels of the last few quarters.

Most credit relevant, from our perspective, is that this deficit is increasingly financed by external debt rather than foreign direct investment flows. Although India’s external debt is still modest relative to GDP and foreign exchange reserves, if this trend of rising external debt continues, it would increase the country’s vulnerability to international financial volatility.

In the near term, the CAD could benefit if oil prices remain subdued and the spike in gold imports plateaus. Another factor, beyond the control of government policies, is the direction of global growth, and how this affects demand for India’s exports.

Moody’s recently said that infrastructure comes in the way of India’s growth potential and leads to higher CAD. It also said the recent reform measures do not address all regulatory and pricing issues on infrastructure. Is this the biggest hurdle in rating upgrade sought by India?
Weak infrastructure raises the cost of production in India. This fuels inflation, and subdues growth. At the same time, higher production costs hurt international competitiveness and thus widen the international trade deficit. It also deters foreign direct investment and raises the incentives for domestic corporations to seek production facilities abroad. Therefore, we have long noted that weak infrastructure is a constraint on India’s rating. It is not the only constraint, however. High government deficits and debt as well as an uncertain policy environment are additional credit challenges that are incorporated into the Baa3 rating.

However, medium term balance of payments stability requires fiscal tightening, increased competitiveness of non-oil exports and import-competing sectors and policies that attract greater foreign direct investment. In the past few months, measures to achieve some of the above have been announced. Whether this results in balance of payments improvements will depend on three things: sustained policy implementation, favourable global growth and financial conditions, and subdued commodity prices.