New Delhi: Back in July, credit rating agency Fitch Ratings first indicated it found the state of India’s public finance bothersome. The local currency outlook was marked down to negative from stable while the outlook for foreign currency remained unchanged at stable. In an interview, James McCormack, managing director of Fitch’s Asia-Pacific sovereign ratings, spoke of the thinking behind that and also of the implications it has had for the economy. Edited excerpts:
Fitch changed its outlook to negative on India’s local currency in July. Can you take us through the steps that led to the change in the outlook?
Downslide risk: Fitch’s James McCormack says India’s growth figure for the next year could slip below 6%. Ramesh Pathania / Mint
The outlook revision was really the result of us taking a hard look at the Budget, the 2008-09 Budget. A couple of things stood out. Some of the off-Budget or below-the-line items, we felt, were flattering the headline a little bit. The improvement in public finances we have seen in India in the last few years have been supportive of the ratings, and have resulted in the rating being moved up a few years ago from sub-investment grade to investment grade. That was a big step. That previous change had been based in large part on our assessment of public finances getting substantially stronger over time and we felt the government had, at both the Central and state levels, concluded that improvements in public finances were supportive of medium-term growth and they saw the linkages between public finances and growth.
So when we looked at this year’s potential performance and we saw some backsliding on that, we became somewhat concerned for the medium term. So, we thought we will revise that outlook. If the deficit is considerably larger than it has been in recent years, that is obviously bad for debt dynamics. We felt we had to indicate that in the outlook.
Were you influenced by finance minister P. Chidambaram’s Budget speech where he actually said he would not be able to meet the revenue deficit target?
Not per se. We don’t want to necessarily measure the government against its own targets. We’ll measure the government against an objective peer comparison. So, we will compare India with other BBB-rated sovereigns.
Since July, we have had a supplementary budget presented in Parliament that gives a much better sense of additional expenditure. Does that trigger something?
The outlook hasn’t changed. To be honest, we are a little bit more interested in what we might see next year in terms of the Budget. This year...we are expecting a deterioration. We are definitely interested in where public finances go from here.
Are we looking at a one-off deterioration this year to be able to deal with higher oil prices, or are we talking about something more fundamental? That’s the question we are not yet in a position to answer. We have to got to think about that.