Mumbai: The nation’s widening fiscal deficit is a cause for concern but if it is short-term in nature, then there should not be much pressure on India’s sovereign ratings, says Takahira Ogawa, director of sovereign and international public finance ratings at global rating agency Standard and Poor’s (S&P).
Ogawa is in India for an assessment of the country’s fiscal situation. In an interview, he said the country’s fiscal deficit is still “very challenging,” and spoke about its ratings prospects. Edited excerpts:
Bullish: S&P’s Takahira Ogawa says 7.8% will be a very robust growth rate for India
Since your last visit in March, what are the changes you are seeing in the fiscal situation?
In March, there was no clear idea about the impact of the measures announced in the Budget and also the recommendations of the Sixth Pay Commission had not been announced yet. Quite a few uncertainties were there which could have an impact on the fiscal situation. Now, things are clearer.
We now have a better indication of the fiscal situation as we have a clearer picture on oil bonds, fertilizer bonds and debt relief on farm loans.
What’s your take on the fiscal deficit?
It’s still very challenging. Obviously, a lot depends on the price of oil. The size of the oil bonds and the support for the fertilizer firms changed a lot. But if the oil prices continue to fall, the support from the government will come down. Similarly, if the implementation of the Sixth Pay Commission continues to get delayed, the impact would also be delayed and it will affect the next year’s fiscal deficit. I would also like to add that the first quarter tax revenue of the government has been very robust.
Do you see any slowdown in growth?
I think our forecast is in line with forecast of the other players—around 7.8%, a very robust growth rate. Yes, compared with last year, things are slower but we have to realize that the growth rate last year was very strong.
With growth slowing down, do you expect tax collection to continue to remain robust?
Although the growth rate is slower than last year, the tax revenue will be substantially higher. Of course, it depends on oil prices, markets and the performance of corporations. It’s very difficult to forecast.
Do you see any impact of monetary tightening by the Reserve Bank of India (RBI)?
Our projection of 7.8% growth is inclusive of all measures taken by RBI so far. If RBI hikes rates or adjust the cash reserve ratio, we might have to adjust our forecast.
What about political uncertainty
The Communist parties’ withdrawal of support may make it easier for the government to promote privatization. Although privatization generally takes time to materialize and will be probably spread over years, it will be good for the country and the economy.
Do you see the government’s fiscal health improving?
The fiscal deficit is actually difficult to control as it depends mostly on externalenvironment, regardless of the economic activities inside the country. However, if the macroeconomic conditions improve and the domestic corporations’ performances are better than expected, we could see improvement on the revenue side.
Fitch Ratings recently downgraded its outlook on India. Any such move on the anvil from S&P?
We upgraded India’s rating to BBB- in the last fiscal year because of the good fiscal consolidation. Our company policy does not permit us to divulge our future course of action.
However, even if the fiscal position gets deteriorated, as long as it’s an issue for short term and the fiscal position is back to its original form, there should not be too much stress on sovereign ratings.
If we find that the fiscal position is structural and difficult to uplift in the short term, then we might have to change our views on the sovereign rating.