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Can’t Cross The Sea Merely By Staring At The Water, Says Fitch On India’s Government Finances

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You can’t cross the sea merely by standing and staring at the water, said poet Rabindranath Tagore. Fitch Ratings’ director for Asia Pacific sovereign ratings, Thomas Rookmaaker, uses that analogy to explain the attempt by successive Indian governments to reduce the central government’s fiscal deficit to 3 percent.

In February, the government said that it will only attempt to meet the 3 percent fiscal deficit target by financial year 2020-21, instead of the earlier planned 2018-19. Simultaneously, the government accepted recommendations of the Fiscal Responsibility and Budget Management review committee to target the debt-to-GDP ratio to 60 percent by FY23.

It’s all about the implementation, Rookmaaker told BloombergQuint in an interview. “The track record of successive Indian governments in implementing the FRBM Act is not great, as we all know.”

You can’t cross the sea merely by standing and staring at the water as Rabindranath Tagore once said. You have to do things as well. It’s about implementation.
Thomas Rookmaaker, Director - Sovereign Ratings, Fitch Ratings

In a review published on Friday, Fitch Ratings kept India’s sovereign rating unchanged at BBB- with a stable outlook. “Weak fiscal balances, the Achilles’ heel in India’s credit profile, continue to constrain its ratings,” it said in a statement. The rating agency added that India’s general government fiscal deficit and debt-to-GDP ratio remains well above other nations in the same rating category.

India’s general government deficit is expected at 7.1 percent for the year ended March 2018 and the debt-to-GDP ratio is pegged at 69 percent, said Fitch.

Of the three major global rating agencies, Moody’s Investors Service is the only one to have upgraded India’s sovereign rating. Moody’s cited India’s continued progress on reforms, its high growth potential and stable financing base as reasons for the upgrade.

Fitch acknowledges the reform of India’s indirect tax system via the Goods and Services Tax but terms it as an “upside risk” to the Indian economy. “It’s an important reform....In terms of revenue intake, you can be quite optimistic although in our own forecasts, we haven’t increased the revenue intake substantially but only gradually,” said Rookmaaker. “It’s an upside risk. That’s how we approach it.”

The downside risk to India’s government finances and the broader economy could emerge from higher oil prices. India imports 70 percent of its oil needs and higher prices lead to a widening current account deficit. It also impacts the fiscal deficit via subsidies on regulated items like Kerosene and LPG. Over the last few years, the government has also increased the excise duty on petroleum products, which has aided revenue collection. Should it cut taxes to soften the inflation blow from higher oil prices, revenue collections in the current year could be impacted.

We have a widening of the current account already with the presumption that oil prices stay where they are. Net FDI has fallen as well and is no longer sufficient to cover the current account deficit. So the basic balance, which is the current account balance plus net FDI inflows is turning to deficit. That makes the external finances of India a little bit weaker. But India’s external finances are strong compared to peers. The reserve buffers of 8.3 months of current account payments are strong.
Thomas Rookmaaker, Director - Sovereign Ratings, Fitch Ratings

Fitch expects the Indian economy to grow by 7.3 percent in FY19 and sees retail inflation averaging 4.9 percent in the current financial year. In that scenario, the rating agency sees an increase in policy interest rates only next year.

However, upside risks to inflation could emerge from oil prices and the new methodology for increase in minimum support prices. This could put the country’s newly instituted monetary policy committee in a difficult spot.

“We don’t expect a rate hike in our baseline scenario this year. Having said that, with the upside risks from oil prices and MSPs, you could imagine the RBI to move earlier especially since its important to the new MPC to build a strong track record...”, Rookmaaker said.

Watch the full interview below:

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