Fitch has reaffirmed India’s sovereign rating at BBB- with a stable outlook. Speaking to Bloomberg TV India, Fitch Ratings Asia-Pacific Director Thomas Rookmaaker says political risks are not expected to disrupt the Indian economy. One of the options for the government to meet the Pay Commission mandate of hiking wages is to extend the FRBM target by a year, he says.
Fitch has reaffirmed India’s rating but here in India there is growing frustration about the pace of reforms. Is that something Fitch is watching out for as well?
We reaffirmed the ratings partly based on the ambitious reform agenda. It is not always easy to implement reforms. Sometimes there is political resistance on the big-ticket items. But still the government is implementing a lot of reforms and gradually improving the structure of the economy, which we see as a positive and also impacting GDP growth in the longer run.
On one hand it is spending to kick-start growth — the government’s capex spending has picked up. And then there is also the wage bill increase that we are expecting now and it seems that the government will face difficult choices in its next Budget. There are a couple of things that the government can do. For instance, it can try to cut elsewhere, like spending in the subsidy bill. It will be difficult for this government to cut capex if it wants to achieve higher growth. There is also a possibility of revenue generating reforms that can be something to look for. Another option would be for this government to hit the fiscal consolidation path in the medium term. We don’t have any indication that the government would not reach its fiscal targets for fiscal year 2016. But after that, when the pay panel recommendations also start to kick in, one of the options for this government would be to extend its fiscal deficit target of 3 per cent of GDP by another year, like they did last year.
The currency has been under considerable pressure over the last three months. Is it a point of concern for you or do you think it is a collateral move given what we are seeing in the dollar?
I do not think it is a cause for concern. If you look at India’s external balance, it looks relatively strong compared with peers, and emerging markets generally have been under pressure, at least in currency markets. And I think India looks well as compared to its peers.
Exports look relatively weak right now and we have seen a continuous fall for a year. Is that a bit of a concern for you?
Yes, I understand that world trade is picking up a bit but generally external demand remains weak and it is something that India is facing as well. One issue that is quite interesting is the China slowdown. Some countries were quite impacted with the slowdown or the potential slowdown in China. But in India it is not so much of an issue. For instance, bilateral trade with China in FY15 was only 3.8 per cent of the total trade and if you include Hong Kong it is 7.8 per cent. For other countries it is up to 25 per cent or even more. So that is not something we see as a major risk for India. But yes, exports are dependent on external demand.
Taking about the external factors, if there is a Fed lift off, what is the impact you see on India specifically?
India is not immune to emerging market jitters. But the external balance looks relatively strong compared with a number of peers. In that sense, we expect less of an impact on India as it will be on other countries.
One of the reasons is that since the Taper Tantrum struck in 2013, the external balance has improved. The current account deficit has narrowed and the foreign exchange reserves have risen quite substantially, by $65 billion. Other reasons are that India is not as much dependent on exports of commodities as it is the case for a number of other countries.
For instance, small parts of the local currency government bonds are in the hands of foreigners. So you wouldn’t expect too much movement there either. So all in all, I think India is not immune but it is not the first place I would think of as the country being hit by a Fed rate hike.