‘Fitch expects India’s fiscal deficit to be higher than peers’

The finance ministry was eagerly looking for a rating upgrade for India, but only Moody's has done so. In its recent report, Fitch retained its rating at the lowest investment grade. THOMAS ROOKMAAKER, director, Sovereign Ratings, Fitch Ratings, tells Indivjal Dhasmana though India improved its position in the World Bank's ease of doing ranking by 30 notches in 2017, reaching the 100th position, its rank continues to be lower than similarly rated economies. Edited excerpts from an interview:

Fitch attributed its decision to retain India's sovereign ratings to the weak fiscal position of the country. Though there is fiscal slippage, the government has accepted the recommendations of the NK Singh panel for a smooth path on fiscal consolidation. Does this not provide comfort to Fitch?

Parliament has taken a positive step towards a more prudent fiscal framework by adopting a ceiling of 60 per cent for the general government debt (state and Centre) and 40 per cent of GDP for the central government debt to be reached by FY25 - if it is eventually adhered to. In the end, implementation is what counts and implementation of the Fiscal Responsibility and Budget Management (FRBM) Act has been quite difficult over the last 10 years. Moreover, fiscal plans can change. This government's initial fiscal plan, set out in 2014, aimed to reduce its deficit to 3 per cent of GDP by March 2018. In the medium-term fiscal framework, this target has been extended to FY21, well beyond this government's term. Weak fiscal balances, the Achilles' heel in India's credit profile, continue to constrain its ratings. Fitch expects a general government debt of 69 per cent of GDP in FY18 (median among peer-rated economies is 41 per cent of GDP) and general government deficit of 7.1 per cent of GDP (the median among peer-rated economies is 2.1 per cent).

The rating agency also said there were governance issues. Are you talking about the Centre’s governance issues or corporate governance issues?

We use the World Bank's governance indicator in our sovereign rating model. This indicator incorporates several sub-categories relating to both government and corporate governance standards, including control of corruption, rule of law, and regulatory quality.

Your analysis talked about the difficult business environment, but India's ease of doing business ranking improved by 30 notches in 2017. Is this not enough?

India’s rise by 30 levels in the World Bank's Ease of Doing Business ranking is positive, although its current ranking is still low, compared to its peers. At 100th position out of 190 countries, India ranks below the medians of those rated at the same grade as India (‘BBB’ category) or a category lower (‘BB’).

The finance ministry pitched for an upgrade. Were its arguments not considered in the report?

Our meeting with the finance ministry was good and informative. For all countries that we rate, we highlight their strengths and weaknesses compared to its peers. India’s rating balances a strong medium-term growth outlook and favourable external account, with a weak fiscal and some lagging structural factors, including governance standards and a stilldifficult - but improving - business scenario.

When can we see rating upgrade?

The main factors, which individually or collectively, could trigger positive rating action are: a reduction in general government debt over the medium term to a level closer to that of rated peers; higher sustained investment; and growth rates without the creation of macroimbalances, such as from successful structural reform implementation.