Christian de Guzman, Senior Vice President, Sovereign Risk Group, Moody’s Investors Service, says “while fiscal consolidation has proceeded apace since we left the pandemic. we need to bear in mind that before the pandemic, before we downgraded India to BAA3, at BAA2, deficits were much narrower, debts were lower. So, we are not quite at that point where we think that India deserves a return to BAA2 just yet.”
Following what the finance minister has announced, it seems we are following the path of fiscal prudence even in an election year. My direct question to you is, does this merit a higher sovereign rating for India anytime soon? Christian de Guzman: I think the direct answer to that question is not yet. One way that we like to sort of look at these things is, is India outperforming its peers and, of course, is India outperforming itself? And it is true that fiscal consolidation has proceeded apace since we left the pandemic. So, we have emerged in a pandemic with steadily narrowing fiscal deficits. But I think we need to bear in mind that before the pandemic, before we downgraded India to BAA3, at BAA2, deficits were much narrower, debts were lower. So, we are not quite at that point where we think that India deserves a return to BAA2 just yet.But, as far as the bond markets are concerned, they seem to be cheering what the government seems to be trying to achieve. As far as lower borrowings go, the government has announced a lower than expected bond sales programme for the next fiscal, because big foreign inflows on global index inclusion is expected in times to come. Hence the bond markets are rallying. Going ahead and looking at India’s ability to be able to draw in capital flows where do you think we stand right now? Christian de Guzman: Well, that is indeed a positive development. But I think we should also note that India’s ability, that is, the Indian government’s ability to access financing has always been very strong. Indeed, there has been a domestic source of captive financing through the banks, through the statutory liquidity department, through the insurance sector which soaks up a lot of this and also the intermediation of savings by local asset management firms and the like. So, that ability to finance itself was never really in question. It was never a weak point in India’s sovereign credit profile. Over time, perhaps this inflow of international money, of non-resident investors into the local bond market could lead to lower financing costs, but only over time.What is it going to take for India to reach a point where the ratings upgrade would come to us easily? Christian de Guzman: Well, let me put it this way. India has a lot of strengths and it has a few weaknesses and the current rating already acknowledges a lot of those strengths including the very robust economic growth. Indeed, we think that India is going to be the fastest growing G20 economy in the world and this, of course, pales in comparison to the two largest economies in the world for which we have negative outlooks on currently.
We also take into consideration things like the improving macroeconomic management, the lengthening track record of inflation management by the RBI amongst other things. We are also looking at the ability to finance itself, as I mentioned, government liquidity risk. We are also seeing some external stability. So, that external vulnerability risk that was very present in 2013 during the taper tantrum, is certainly not present. All of these strengths are incorporated. However, we do not necessarily see just yet how the weak points of India’s sovereign credit profile are strengthening in a material way.
Indeed, we do acknowledge that there has been some fiscal consolidation, as I had mentioned, over the past few years emerging from the pandemic. But that has not yet, at this point and going forward by a year or so, at least through the path that has been articulated in today’s budget, we are not seeing a degree of fiscal consolidation that would lead to material debt reduction.
Debt, as I had mentioned earlier, is still above where we saw India prior to the pandemic, about 10 percentage points higher. And perhaps the other thing that we are looking at is not just deficits, not just debt, but we are also looking at debt affordability. Here, we have not seen meaningful strides in terms of the share of revenues that are dedicated to debt servicing and that is a function of the currently very high debt.
How do you assess the global cues that we are getting as far as India is concerned? Going ahead from here, since you have this kind of global outlook, in terms of India being able to manage its inflation and being able to stick to a path of fiscal prudence, where does India stand in being able to tackle the so-called weaknesses that you are alluding to?
Christian de Guzman: When we look at the Asia Pacific region, India is not alone in terms of facilitating gradual fiscal consolidation away from the pandemic settings. There was a general weakening across the board in terms of fiscal deficits and debt burdens for pretty much every country. For a specific subset of those countries, including some of India’s neighbours, such as Pakistan and Sri Lanka, they have gone the other way, of course.
But for the most part, a lot of India’s emerging market peers continue to sustain high growth, not as high as that of India, but they continue to sustain fiscal consolidation as well, albeit at a slow pace. So, India really is not alone in terms of some of these trends that we are seeing.