India stable, but no upgrade: Moody’s

Moody’s currently rates the country’s foreign currency debt at Baa3 and local currency debt at Ba2, with a stable outlook. It said that an upgrade would happen only with “significant improvement in government debt dynamics".

A statement released from Hong Kong said: “In the absence of further public-sector reform, the government’s overall financing need will remain onerous, and overall fiscal flexibility will remain constrained by a high debt and debt-servicing burden. As such, structurally tight onshore liquidity amidst ongoing monetary tightening heightens short-term growth risks facing the Indian economy."

The budget deficit, measured by India’s gross borrowings in 2006-07, was Rs1,52,328 crore for 2006-07, or 3.7% of its gross domestic product, compared with 4.5% in 2003-04.

Justifying the lack of upgrade, lead analyst for India, Aninda Mitra, told Mint: “We have not seen any material change in key external credit ratios or government finances, relative to similarly rated peers. Nor, in our view, has there been any notable change in government policies that could have a lasting impact on the sovereign’s ability to repay debt."

“That could be a rather harsh conclusion, especially in the context of the sharp improvement in the revenues position since 2004," said M. Govinda Rao, director, National Institute of Public Finance and Policy and member of the Prime Minister’s economic advisory council. Gross tax collections came to Rs4,70,077 crore last fiscal, compared with Rs2,54,923 crore in 2003-04, an 84% jump in the three years since the last upgrade.

Admitting that there has been “considerable fiscal consolidation in line with FRBM (Fiscal Responsibility and Budget Management) targets", Mitra said, “Even as the assumptions (growth, real interest rates, etc.) underlying this consolidation have been far more benevolent than expected at the time the Act was framed, the actual pace of consolidation has not been much swifter. India still has one of the highest public debt burdens in the world and its fiscal flexibility remains challenged and possibly vulnerable to fiscal or political shocks."

Under the FRBM Act, India should have a fiscal deficit of 3% of its GDP and zero revenue deficit by next fiscal, or 2008-09. Fiscal deficit is budgeted at 3.3% for the current fiscal so that the target could still be met, but the revenue deficit target appears to be a stretch.

Rajiv Kumar, chief executive of Indian Council for Research on International Economic Relations, an autonomous policy-oriented research organization, said: “Our public fisc really doesn’t look good, especially if you take into account the off-budget liabilities like the subsidies on petrol prices. Even in terms of revenue deficit, we are way behind the FRBM target of zero by 2008-09." India is expected to close the current fiscal with a revenue gap of 1.5% of GDP.

Kumar said not getting an upgrade shouldn’t make a huge difference. “These are essentially sovereign ratings, and all the action is in private capital," he said. That is a view that Moody’s endorses, though with caution. “The monetary policy framework is challenged in this environment, since higher local interest rates and the fast-growing economy have attracted massive capital inflows, which have amply financed the current account deficit, but have put upward pressure on rupee and prom-pted concern about external competitiveness," it said.

Moody’s also listed as economic challenges, infrastructure and the process of “economic reform hobbled by coalition politics, bureaucratic inefficiencies, and vested interest groups".