S&P to retain India's sovereign rating at BBB-

Standard & Poor's plans to retain India's sovereign rating at BBB-, reports CNBC-TV18.

TK Ogawa, Director - Sovereign & IPF Ratings at Standard & Poor's said, fiscal consolidation may slow this year on election pressures. "We will review rating depending on the next government's efforts to rein in deficit. We see this year's fiscal deficit at 3.5% of GDP, including oil, and fertiliser subsidies. Capital flows are slowing but are still robust and is enough to cover the current account deficit."

Excerpts from CNBC-TV18's exclusive interview with TK Ogawa:

Q: You are going to see a fairly sizable jump in the fiscal deficit this year irrespective of what the government says on paper, does that make you want to review your rating?
 
A: There are a few reasons for this years fiscal position, might not be as good as last year’s partly because of the incoming election. The government has to be mindful for the benefit of the nation and they have to have the kind of populist policies.

Also the Pay Commission recommendation has come out and they have to take into the account the improvement by September. The other thing for obvious reasons is the higher oil price and the higher food prices and so on.

So that could make the monetary policy and the fiscal policy difficult.

Because of higher oil and food prices inflation is high. So the monetary policy tends to be tighter. So to strike a balance between the growth and the entire inflation is a very important issue for the monetary authority, which might not be good for the government policy because there is a conflicting factor between the entire inflation and the economic growth.

Q: So as a rating agency, how do you look at it? Irrespective of the populist pressures, there will be a widening deficit; will you want to review rating?

A: At this stage, we take into account the current higher oil price that could increase perhaps the issuance of the oil bonds and the fertiliser bond, which is not inclusive of the government budget figures. If we look at last year, it could be about 0.4% of the GDP, and this year we estimate and forecast it could be about 1% to 1.5% including those oil bonds and the fertiliser subsidies as well as some other issues.

Q: In that light, are you looking at providing the rating that Lata pointed out which is currently still standing at a BBB-, so would you be looking at revising the rating or the status on the balance of payments?

A: We are more focused on the medium to long-term prospects. This year perhaps fiscal consolidation might not be as robust as the last few years. But come next government whichever the government is, how they could keep the momentum of the restructuring of the public sectors as well as the fiscal consolidations, this year maybe we might have momentarily a setback because of the electoral cycle.

Q: So if we understand you right, S&P will not want to change its rating or its outlook in a hurry, you would rather wait for the new government and see whether responsible steps are getting taken next year?

A: At this stage for example, we have a stable outlook, which means that within a half year to one-year time horizon the rating is most likely to be as it is. Also we take the factors of the election and because of the election the government would have a kind of populist policy, which is also taken into account.

So the momentum of the restructuring of the economy and the boom of the economy is there. But this year maybe a little bit of a slowdown for the fiscal consolidation side, which is our view at this stage.

Q: If you can give us some number on that, what kind of a fiscal deficit are you expecting in the current year and secondly what kind of a current account deficit are you expecting considering that there has been a fairly decent depreciation of the rupee?

A: For example, the fiscal deficit according to the government budget, the central government fiscal deficit is something like 2.5%. But I think we will expect something like 3.5% which is inclusive of the items like the subsidy for the petroleum companies and fertiliser companies, which are not included in the line items of the government budget.

Also, if we look at the current account balance, the current account deficit might be increasing but we have to look at the overall balance because investment account is also another factor that we have to take into account. Of course in the long term if there is a big current account deficit that might not be encouraging the incoming flow of the investment account.

But at this stage if you look at the Indian situation the pace has been slowed down. But there is still a steady flow of money coming into the Indian market.

Q: A quick check or a word of your expectation on inflation by the close of this year for India?

A: It depends on the monsoon and the future course of the oil price. But I think at this stage the inflation rate could be something like 6%.