What are the key parameters that have been an impediment for India to get re-rated because if I understand it right, we have been stuck at that BBB minus for the longest time now when it comes to the global ratings. What is your view?
I think that India’s ratings are balanced essentially between very healthy and stronger growth prospects and are consistent over the years on a trend basis too and a strong external position or you could say a strong external balance sheet weighed against very weak fiscal performance of the governments that is characterised by high fiscal deficits on an annual basis.
This year, we forecast that just above 10% of GDP and high debt stock at the general government level as well. We see that as being around 87% of GDP on a net basis. In balance we have a BBB minus rating here with a stable outlook.
And is there a case where you think the macros have changed and something has turned for the better for you to relook at it? Do you think there has been nothing material in terms of the changes, fiscal deficit, etc to make a change in your ratings?
When we take a step back and look at the landscape, certainly things are challenging on the external front. That means India is going to be running a higher current account deficit this year. There is a little bit of pressure on the rupee at the moment as well and there is some inflationary pressure globally and also in the domestic economy in India.
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We are keeping a close eye on these factors. We expect growth to be pretty strong going forward still. We see the economy growing at a rate of 7.3% this year and then over the next few years, staying above 6.5% on a real basis per year. That is good news but what we would need to see over time is to put more upward pressure on the ratings, which will certainly be more powerful, more expeditious fiscal consolidation. So consolidation of the general government deficit as well as the debt beginning to come down materially compared to the size of the economy.
So for it to fall well, the GDP and also for the interest burden of the government that is around 27% of total revenue on an annual basis, has to come down significantly as well.
What is the median in terms of debt to GDP or the interest cover to revenue? What are those metrics and the mediums that you had to look for and how far away is India in that?
When we look at the debt stock for instance, the weaker threshold India is meeting currently is 80% of GDP on a net basis. Again debt stock is larger than that. At the moment, we forecast it to remain larger than that for a number of years beyond 2022. The interest burden of the government is more than 25% of revenues per year that is well above our weaker threshold which is 15%. So we would be looking for a lot of progress on that front too.
If we compare India to emerging market economies, a debt stock of close to 90% of GDP certainly is in the weaker group. At the same time, that interest burden is flagging to us that the efficiency of the fiscal programme could be tighter as India is spending a significant proportion of revenues on debt service every year, rather than on social services or capital expenditure.
How does all of these numbers change? When you suddenly start to see capex picking up, you start to see a lot of positivity and a lot of big groups have done a lot of M&As and have announced a lot of capex going ahead across businesses. How does debt servicing change the government bid to push capex?
We are pretty constructive on the capex cycle in India right now. That goes both for public sector capex as well as private sector capex. We do see supporting economic and productivity growth over the next few years. At the same time, we are seeing capex as a proportion of the general government budget, certainly of the central government budget growing. That means the quality at the margin of the central government budget is getting better on an annual basis and that is good news.
However, again if I point back to these fiscal indicators and debt indicators that we are looking at very closely for India, it will take some time for those to improve materially as we are looking at much stronger numbers or levels that might start to feed into upward pressure on the ratings.
Is there a case to be made that you will have to shift your median itself given the macro headwinds that we are seeing across the globe on a relative basis? You have to acknowledge that India is doing a bit better than what at least is happening in the West, whether it is the UK or the European geographies.
Another important metric that we look at in our ratings is the state of the economy. I mentioned strong growth prospects in India, especially over the next few years but we look at per capita GDP too. This gives us a good idea in terms of the level of development of the economy, the productivity and the wealth that the government is able to draw upon in order to service its obligations.
India’s GDP per capita is going to be a very key differentiator in the ratings construct if we are comparing it to western European ratings – typically speaking to sovereigns there as well as in North America. So that remains the case
In terms of the debt numbers themselves, these are relative to GDP to begin with but at the same time, I want to make clear that these are absolute levels so that we do not compare to meet again in the same ratings class. But we compare on an absolute level. We see that debt stock in India is among the higher ratios that we see around the world, either for the emerging market or the developed market.
lose to 82 to a dollar, the dollar index is at 114.4. What do you make of the havoc that is happening across currencies?
We are seeing a lot of pressure through the currency channel across the region right now and India is not immune to this totally. We are seeing downward pressure against the rupee and we are again seeing a higher current account deficit in India this year, which could approach 3% of GDP.
However, the external balance sheet in India is quite strong from our perspective. So right now, we see India as a modest external creditor to the world and we also know that the government does not have essentially foreign currency denominated debt and so are able to fund themselves entirely in local currency markets.
Also, when the currency weakens, that means that the debt stock is not going to rise significantly relative to GDP because we are not having that currency exchange effect and that is good news. What it means is that this strong external position of the Indian economy that we have been noting for a long time and factoring into the ratings remains in play, remains the case.
We could see in future that if the current account deficit remains higher for longer or a little bit deeper than what we are forecasting or expecting right now, India could become a modest external debtor economy again. But we do not see that as a major challenge or risk to the ratings at the moment.
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