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No pre-determined time frame for change in ratings on India: Atsi Sheth

Moody’s Investors Service currently rates India at the lowest investment grade. Moody’s vice-president sovereign risk group Atsi Sheth tells Indivjal Dhasmana that at the moment India is likely to have this rating only. Going forward, India might have an upgrade or a downgrade, depending on how the parameters governing the rating move significantly under the Narendra Modi government. Edited excerpts:

How much time would you give to the next government before you revise credit ratings of India?

There is no pre-determined time frame. Rather, any changes in a rating depend on the extent and pace of change in credit fundamentals. At this time, our view is that current credit metrics and likely credit developments support India’s Baa3 sovereign rating (lowest investment grade). We will continue to monitor the variety of factors that affect India’s credit profile. These include domestic macro-economic developments, global factors, as well as fiscal and regulatory policy measures implemented by the new government. Any possible change in the sovereign rating or outlook will depend whether some of the above factors change India’s credit profile significantly.

Are there any chances of upgrade in rating as well, since for most part of the UPA-2 government there were fears of a downgrade?

Our stable outlook on India’s Baa3 rating reflects our view that the current rating appropriately captures the sovereign credit profile and that India’s credit metrics are in line with similarly rated peers. That is, the rating outlook suggests that, at this time, the likelihood is the rating will remain at its current level. Any rating change, upward or downward, will depend on changes in credit trends in India, particularly trends in government finances, inflation, regulatory developments and infrastructure.

Since you said change in credit profile of India depends on fiscal deficit as well, do you expect the government to tweak food security law and other flagship schemes of UPA?

If the new government focused on reducing the fiscal deficit, they could do it either via measures to expand the government’s revenue base or by reducing the government’s expenditure commitments. At this time, it is unclear what specific measures will be undertaken and whether they will include tweaks to the expenditure commitments made by previous governments. The choice of measures will likely be determined by the net impact of the measure on the fiscal deficit weighed against the administrative costs, parliamentary process to implement that specific measure. Measures that require changing laws – which is a lengthy process – and that would face significant political opposition or social consequences may have to yield significant savings for the government to adopt them. On the other hand, there might be several initiatives that present fiscal savings and that can be implemented without legislative changes.

If the government sticks to fiscal deficit at 4.1 per cent of gross domestic product as was given in the interim Budget, will it be suffice to retain the credit rating or up it?

India’s central government deficit as well as the general (state and central government consolidated) deficit ratio has long been higher than that of most other governments at similar rating levels. These high deficits are a constraint on the Baa3 rating. With regard to your question, our analysis focuses on the medium term fiscal strength of the government, rather than the fiscal outcome in a single year. Given that the new government will only be able to influence fiscal developments in the second half of this year, whether the current year’s fiscal deficit is a little above or below the target set by the previous government is less a determinant of the sovereign credit profile than measures introduced by the new government that will affect fiscal outcomes in the next two-three years.


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