Mumbai: Singapore-based Takahira Ogawa, Standard and Poor’s (S&P) sovereign credit analyst tracking India, does not see much of an impact on the borrowing cost of Indian companies following the change in outlook from “stable” to “negative”, but warns there is a possibility of a rating downgrade if India’s fiscal deficit widens further. Edited excerpts.
Will S&P downgrade India if the fiscal deficit continues to widen?
There is a possibility for us to downgrade if the level of India’s fiscal deficit increases substantially.
India has high foreign exchange reserves and you expect the external position to remain resilient. Do you see any impact on this following continuous capital outflow?
Apparently the outflow of funds from India has been reducing one of the country’s strengths for sovereign ratings. There is a risk, though chances are low, of further increase of outflow of funds if something wrong happens in the global financial market, global economy or in the domestic economy. However, at this stage, India has a reasonable level of foreign currency reserves to mitigate the level of payment of the external debts compared with other sovereigns rated in the same category.
Tracking India: S&P’s credit analyst Takahira Ogawa.
What should India do to contain the high fiscal deficit?
The government needs to go back to the track for fiscal consolidation as soon as possible. Or else, the size of debt burden relative to the size of the economy increases and it becomes more difficult to control. It would also act as a negative factor for the recovery of the economy if there is significant overhang of the government debts, which would crowd out the private sector companies from the opportunity to access to their funding. It will also increase the cost of funding. This, in turn, will adversely affect the pace of economic recovery in an extreme case.
With the general election round the corner, do you see any risk arising out of political uncertainties? How much weight do you give to political factors while assessing risks and assigning ratings and outlook to a country?
Whoever comes to power as core party in the next coalition government, (the) Congress or (the) BJP (Bharatiya Janata Party), in principle, there is no fundamental difference in terms of economic policies. There could be differences in prioritizing various policy measures. But it depends on the strength of the core party in the coalition and the composition of the coalition. For example, if there are Communist parties in the coalition, the government might find it difficult to move ahead with certain policies such as privatization programme. This could hamper the improvement of the efficiency of the economy.
What will be the impact of the outlook revision? Will Indian firms have to pay higher interest rates to borrow overseas?
I think the level of interest rate which the Indian companies have to pay is more a function of how well the international financial market is functioning. At this stage, it is very difficult not only for the companies in emerging markets, but also in the developed countries to raise funds in the international market, because of the lack of the liquidity and uncertainty of the global financial and capital markets and economy.
Besides, the terms and conditions of the interest rate which Indian companies have to pay will be primarily decided on its credit strength, not the government, unless it is a government-related company or the debts of the company, are attached with the government guarantees. Though the change of outlook attached on India’s sovereign ratings might adversely affect the funding cost of Indian companies in the international market, it would not be that significant, except for a very short period.