International rating agency Standard & Poor’s (S&P) move to reaffirm a negative outlook and rating of ‘BBB (minus)’ for India has not gone down well with the Finance Ministry, which feels the country deserves a stable outlook now.
“S&P has missed an opportunity to make an upward revision in rating or outlook on India’s sovereign debt, given the credit strengths of the Indian economy and the Government,” a senior Finance Ministry official said.
Essentially, a sovereign rating is an opinion about the ability and willingness of a country to repay its sovereign debt. This rating is done after assessing the growth prospects of the economy, the reform measures being undertaken by the Government, financing requirements of the Government, and its sovereign debt profile among others.
First, let’s examine the growth prospects.
For fiscal 2013-14, the Finance Ministry’s growth estimate is between 6.1-6.7 per cent, while the Prime Minister’s Economic Advisory Council has put this at 6.4 per cent, the Reserve Bank of India has pegged it at 5.7 per cent and most international agencies think it will be around six per cent.
In fact, S&P’s own projection is around six per cent, higher than many other economies in the Asia Pacific, except China.
Two, inflation. The Wholesale Price Index-based inflation (WPI) for April was at 4.89 per cent, the lowest in 40 months. At the same time, retail inflation in April was 9.39 per cent.
S&P, in April last year, had mentioned that high inflation may derail India’s macroeconomic growth. Now when inflation is down, the agency has failed to take note of the improvement, the Ministry feels.
Coming to the twin deficits — fiscal and current account — S&P remarked that large fiscal deficits and debt, as well as its lower middle-income economy, constrain ratings.
Here, the Ministry feels that a fiscal consolidation road map has been laid down, which intends to gradually reduce the fiscal deficit to three per cent in 2016-17. The fiscal deficit for 2012-13 is likely to be around five per cent and 4.8 per cent for 2013-14.
The Finance Ministry official rued that S&P had not appreciated the positive points of India’s debt profile.
First, the country’s current debt is largely dominated in local currency.
Second, deep capital markets and availability of prudential instruments like SLR (Statutory Liquidity Ratio) have provided flexibility to the Government to raise debt in domestic markets and not be dependent on international markets.
Third, indicators such as short-term external debt, external debt-to-GDP ratio, debt service ratio, maturity and yield profile of Government debt are well within the comfort zone, and better than many peer group countries.
Also, S&P has taken note of India’s current foreign exchange reserve but not adequately so.
The Finance Ministry highlighted the improvement on various debt indicators.
For example, during 2006-12, India’s debt/GDP ratio decreased by 12 per cent, while this ratio of the S&P’s BBB peer-group countries increased, on average, by 13 per cent. The Ministry also said that the level of India’s fiscal deficit and debt was not high as compared to the other large economies.
In terms of current account deficit, S&P’s estimates 4.2, 4.5 and four per cent for 2011-12, 2012-13 and 2013-14. This is in-line with Government expectations, but Ministry officials felt that the most significant aspect is that the maximum part of this deficit was being financed by forex inflow and there was no need to tap the reserves.
Finally, the Ministry termed S&P’s doubts about the success of the Cabinet Committee on Infrastructure as premature. It has just been a few months since this committee was set up and investments or production would soon start in the projects that have been cleared.
Further, if S&P harbours doubts about investment picking up, then it is not clear how it has projected a growth rate of seven per cent in 2015-16 — second-highest amongst comparable Asia Pacific economies, Ministry officials added.