‘Rating reflects our take on impact of reforms’

THUMBSUP Moody’s says India’s potential higher than other Baarated nations NEW DELHI:

Credit rating agency Moody’s Investors Service on Friday upgraded India’s sovereign rating. In an interview, William Foster, vice-president of the sovereign risk group at Moody’s, said lower tax revenue this year than planned in the budget and higher government spending could lead to the fiscal deficit (GDP) overshooting the target of 3.2% of gross domestic product (GDP). Edited excerpts:

Moody’s, in its report, says the debttoGDP ratio will increase this year by one percentage point to 69%. What justifies a rating upgrade then, since this has been a major drag on India’s ratings?

The rating upgrade reflects our expectation that continued progress on economic and institutional reforms will enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term. Recent reforms also offer greater confidence that the high level of public indebtedness, which is India’s principal credit weakness, will remain stable, even in the event of shocks, and will ultimately decline gradually.

Moody’s also acknowledges that nominal GDP has slowed following demonetisation and the implementation of the goods and services tax (GST). Is the rating upgrade then a preemptive move based on future economic gains?

In the longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns. The range of reforms aimed at improving the business environment, increasing formalisation of economy or anchoring stable inflation all contribute to further enhancing the capacity to absorb shocks.

In the near terms, we have revised our GDP growth forecast down to take into account the immediate impact of demonetisation and disruptions related to GST. We forecast real GDP growth to moderate to 6.7% in the year ending in March 2018. However, as disruption fades, we expect to see a rebound in real GDP growth to 7.5% in the next fiscal year.

Is it advisable for the government to move slower than earlier anticipated on its road map for fiscal consolidation to support growth? What are the ideal fiscal deficit and debt to GDP ratios that India should aim to achieve?

We forecast the general government budget deficit at 6.5% of GDP this fiscal year, similar to the last two fiscal years.

Lower government revenues than planned in the budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted. However, we think the government’s commitment to fiscal consolidation remains. Over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a gradual narrowing of the deficit.

In November 2016, Moody’s had kept India’s rating unchanged, holding that “the reform effort to date has not yet achieved the conditions that would support an upgrade to Baa2, in particular in accelerating private investment to support high, stable growth, without which the government’s debt burden—a key constraint on the rating—is likely to remain high for a sustained period”. Does Moody’s now see a quick turn around in private investment to support growth?

The government has a vast reform agenda, with some measures already implemented, some at the design stage and some likely more remote.

The range of measures include steps towards improving the business climate, fostering foreign investment, encouraging greater formalisation of the economy and establishing a credible and effective monetary policy framework.

Other measures that have yet to reach fruition include planned land and labour market reforms, which rely on cooperation with and between the states.

Over time, measures implemented and planned such as GST removing barriers to trade within India, steps aimed at enhancing the business environment, encouraging foreign direct investment, providing greater visibility about future inflation will contribute to higher investment. Most of these measures will take time for their impact to be seen.

Did Moody’s take into consideration India’s sharp increase in World Bank’s Doing Business ranking? Any reason it has not been mentioned in the rating upgrade report?

Over time, measures aimed at broadening the tax base and improving efficiency of govt spending will contribute to a gradual narrowing of the deficit.

The upgrade reflects an overall assessment of India’s credit strengths and challenges in all areas that are relevant to sovereign ratings.

Measures that improve the business environment will foster sustained high GDP growth, a credit positive.