Q&A: Takahira Ogawa, Standard & Poor

'Inflation is India's biggest challenge in the near term'

Takahira Ogawa, sovereign analyst and director, sovereign and international public finance ratings, Standard & Poor’s, spoke to Rajesh Bhayani on the impact of the US rating downgrade and factors that could influence India’s credit rating. Edited excerpts:

Will the West’s economic concerns and the US rating downgrade impact India’s credit worthiness?
As you can understand, we cannot comment about future meetings or rating actions. What we can say is that we are in continuous dialogue with the Government of India on the rating of Indian sovereign debt and will continue to discuss rating issues with them directly. Standard & Poor’s credit ratings are independent, forward-looking opinions of relative creditworthiness. They provide investors with a common and transparent language for evaluating and comparing credit risk across asset classes and markets. They are one of the many inputs that investors can consider in their decision making process.

What are the key challenges or negatives that can impact India’s credit rating?
In terms of India’s sovereign rating (BBB-/Stable), according to us, inflation remains India’s biggest challenge in the near term, as it could push up credit costs and dampen the country’s economic growth trajectory. Although the pace of food prices seem to have stabilised to some extent, the prices of manufactured products are on a rise. Ballooning fiscal deficits also constrain the sovereign ratings of India. Continuing its fiscal consolidation policies into FY2012 will be a key challenge for the government.

India seems better placed compared to many European nations, which enjoy higher ratings. What, then, could help India’s cause?
We could raise the ratings on India if the government continues to reduce the public sector’s deficits materially. For example, future government initiatives to significantly reduce subsidies for fertilisers, food and fuel would be a positive factor in improving the expenditure structure of the budget and reducing the negative influence of potential external shocks on India’s fiscal position. Strong commitment of the central and state governments to the medium-term fiscal consolidation plan set out in the recommendation by the 13th Finance Commission is key to India’s fiscal consolidation. Early implementation of the GST could help stabilise and potentially increase government revenues in the medium-term and become a further positive factor for the sovereign ratings. Conversely, continued loose fiscal policy or policy setbacks on monetary, financial and economic reform fronts that lower India’s medium-term growth prospects could result in a downgrade.

Where does India stand within the Asia-Pacific region in terms of responding to the US rating downgrade?
The adverse impact on Asia-Pacific in that scenario would likely require governments to use their balance sheets to support their economies and financial sectors once again. And, in our opinion, most governments would promptly oblige. But some of them continue to bear the scars of the recent downturn — the fiscal capacities of Japan, India, Malaysia, Taiwan, and New Zealand have shrunk relative to the pre-2008 levels. If a renewed slowdown comes, it is likely to create a deeper and more prolonged impact than the last one. The implications for sovereign creditworthiness in Asia-Pacific would likely be more negative than previously experienced, and a larger number of negative rating actions would follow.