Fiscal deficit, poor infrastructure constraints for India’s ratings upgrade - Click to Download
Fiscal deficit, poor infrastructure constraints for India’s ratings upgrade:
Atsi Sheth Vice President, Sovereign Risk Group, Moody's Investors Service Inc,
ET Now: Firstly, a word on how the data from India is looking like. We have seen the IIP figures and yesterday, we saw the inflation numbers as well to be as high as 7.5%.
Atsi Sheth: Certainly, like you said, the inflation is still high. It was expected to abate slowly, but that is clearly not happening. At the same time, growth which was expected to pick up seems to be stuck at a fairly low rate. The IIP figures tell you that industrial growth clearly has not been picking up yet and we expect it to persist for the next couple of quarters.
ET Now: So it is a tricky time right now for India. We have got the big general elections next year and the macroeconomic situation does not seem to be quite improving. How would you, as a ratings agency, analyse India now and what could trigger a ratings upgrade, according to you?
Atsi Sheth: There are two key constraints that keep India's rating at BAA3. One is the fiscal position of the government. That fiscal deficit in India is really much higher than similarly-rated countries.
So if that fiscal position were to improve -- we do not expect it to -- that would be positive for the credit profile and the rating and the other constraint that we see on India's credit profile is the infrastructure position. India has enjoyed a very high growth rate over the last decade and even now it is growing at 4.5%-odd. India's growth is actually above that of emerging markets.
However, given its infrastructure position, whether it is soft infrastructure like education, skill set and so on, or hard infrastructure like roads, ports and others, India does not compare very well with competing emerging markets and we think that if that were to change, that would be a cause for an upgrade, because that would really free up the potential growth rate for India over the longer term. So those are the two things that we are watching.
ET Now: There has been quite a bit of improvement on the CAD and trade deficit fronts, as well as on the outstanding FII position in the debt market. How do you think we will react if indeed tapering is announced tomorrow?
Atsi Sheth: If this is a question specific to India, you are absolutely right that the macroeconomic fundamentals in one sense have improved dramatically from May and this is clear in the current account deficit, which is much narrower than it was then.
However, there are a couple of uncertainties which you yourself have alluded to. One would be the elections that are coming up and that will affect capital flows into India over the next couple of quarters. So the tapering announcement might have a different impact on India than other emerging markets, depending upon how the political scenario is analysed.
The second aspect is inflation. If India's inflation remains high, the market will anticipate growth to probably suffer over the next year as well and that might affect capital flows into and out of India. Hence those are the two things, specific to India, that might affect it in addition to the current account deficit over the next couple of quarters.
ET Now: So what happens to the currency? Do we remain stable as is the case right now, or do you think we could again head back to the lows that we have come out from?
Atsi Sheth: Our forecast is that it will remain at current levels. There might be some event-driven volatility. That could be a global event like an announcement related to tapering or a domestic event like an announcement related to the elections, but our forecast is that the currency will remain around current levels. We certainly do not expect a dramatic appreciation over the next two quarters, nor do we expect a dramatic depreciation at this point.