International rating agency Fitch Ratings has affirmed India’s sovereign ratings at 'BBB-' with stable outlook. The rating agency says India’s economic growth is expected to accelerate to 7.7 per cent in the current fiscal.

Speaking to Bloomberg TV India , Thomas Rookmaaker, Director - Sovereign Ratings, Fitch Ratings, says India’s government debt is closed to 70 per cent of GDP while the BBB peer median is close to 40 per cent, which keeps India’s rating lower than many other Asian nations. It is still not clear how much the government’s support to banks will be, he said. Excerpts:

You have highlighted two pressure points in your report despite the stable rating. One of them continues to be on inflation and the other possibly on the CAD front. Can you run us through the concerns or the possible hitch we may see on those numbers?

First, India enjoys a BBB- rating and a stable outlook. We look at a large number of factors, not just the two that you mentioned. But comparing India with its peers, we see a strong medium-term growth and also favourable external balances. And at the same time, we see a weak fiscal position and also difficult business environment, although it is improving slowly.

What is interesting to know is that there are a couple of uncertainties now compared with six month ago when we last looked at India. And one of those uncertainties is whether inflation will remain structurally at a lower level? There are a couple of reasons for these uncertainties. One is, who is going to be the new RBI Governor. The other one is, what is the new Monetary Policy Committee (MPC) going to look like. And the question about the inflation target is: are we going to see the same inflation target of 4 per cent-plus or minus 2 percentage points going forward.

Other uncertainties relate to the medium-term fiscal framework with a committee now looking at the FRBM Act on some short-term uncertainties on medium-term framework. At the same time, it may bring an opportunity to get fiscal parameters closer in line with India’s peers. India’s government debt is closed to 70 per cent of GDP while the BBB peer median is close to 40 per cent. So that is one of those uncertainties as well. And there is the bank situation. It is still unclear how high the government’s support is going to be, and it is a contingent liability from a certain perspective.

Thailand, which is run by a military regime and which has thrown out a democratic government, has a Fitch rating of BBB+. Indonesia, where 34 per cent of the bonds are held by foreigners and has actually collapsed in 1997, has an S&P rating of BB+.

In that scenario, can you explain why India remains just BBB- when the sovereign has never defaulted in the last 70 years?

We look at these counties on the basis of a large number of parameters. Comparing India with Indonesiais very interesting. In India, we see that the externals are strong with large reserve buffer and the current accounts that have narrowed. In Indonesia, we indeed see 38 per cent of government bonds being held by foreigners, dependence on commodities exports, which make us believe that the external balances are weak. But if we look at the fiscals, we see that in India the government debt to GDP ratio is close to 70 per cent of the GDP, while in Indonesia they have a very clear fiscal policy rules, basically the same as the Maastricht policy rules of 60 per cent debt level maximum and 3 per cent deficit level ceiling. They do not reach the 60 per cent debt level because it is only 26 per cent. In that sense, Indonesia is compared more favourable than India. But like I said, we look at a large range of matrix and in those parameters some countries are better than other countries.

Related Topics