Economic affairs secretary R Gopalan said that he had expected S&P to retain its stable credit rating outlook for India.
On Wednesday, the ratings agency cut its outlook on India's BBB- rating to negative from stable and warned it had a one-in-three chance of losing investment-grade status, sending shockwaves through the ministry. Its decision could raise costs for Indian borrowers and undermine foreign investor confidence in Asia's third-largest economy.
At the meeting two weeks ago with S&P credit analyst Takahira Ogawa, Indian officials had argued that tax returns were rising and debt levels were on the decline compared to gross domestic product.
But sceptics say India is politically unable to take major steps to rein in ballooning subsidies, now more than 2% of GDP. Private economists also say the government will struggle to rein in its current account and fiscal deficits and revive GDP growth while world energy prices are high, and with a period of election spending looming.
Speaking exclusively to CNBC-TV18, Gopalan said that the government is determined to contain the fiscal deficit below 5.1% level. He said the government needs to act very fast to curb the subsidy levels. "We need to take the diesel deregulation forward," he reiterated on the channel.
However, he was unable to give a timeframe on the oil reform prices.
With the government staring at a slowing economy, triggered by a lack of reforms, the Cabinet on Thursday cleared the Banking Laws Amendment Bill, 2011, which could bring some cheer to investors, but needs to be cleared by parliament.
Foreign institutional investors fretting over the General Anti-Avoidance Rule (GAAR) will have to wait till the second week of May to get a clear idea of what lies in store for them.
According to Gopalan, GAAR has to be investor friendly and transparent, but not arbitrary. "GAAR will vest onus of proof on tax department and not the taxpayer," he emphasized.
He expects FY13 to see the highest foreign direct investments into the country.
Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.
Q: The S&P officials met you before coming to this change of outlook. Are you surprised by this decision?
A: I would rather say that we had indicated very clearly as to how we stand in relation to a number of other countries, , basic strength of the economy and the forward direction which we are planning to go. With all this, there was a view amongst all of us that we had made a very clear case for our country. So in that sense, having done that kind of work and with all my colleagues who had put in tremendous amount of work to convince S&P, we felt that it could have been better.
Let me also tell to you what factors we mentioned to them. The higher gross domestic product (GDP) growth which which during 2003-2011 was 8.2% while most other peers were between 2% and 5%; the growth volatility India’s was 1.6% in the same period while other peers were 2-6%; India’s government external debt to GDP was 4.9% while the ‘BBB’ median was 34%; India’s lower external debt to GDP was about 13.1% wile the ‘BBB’ median was 48%.
We also mentioned foreign exchange reserves, lower external debt service ratio, financial market development, higher resilience in government finances, better capacity for innovation and business sophistication, better quality of India’s public institutions a degree of labour freedom, better quality of education in general for math and science and better attractiveness as an FDI destination.
So we had put out number of factors which showed us to be much better than our peers in the category in which we are. So what we feel is that it was not fair.
Q: If we have to get back to that stable outlook, what does the government have up its sleeve on fiscal deficit? How soon are you expecting the government to move on fiscal deficit, especially on increasing diesel prices?
A: Government has a process to follow and as far as the policy decision is concerned diesel has a different setting at this point in time. We must understand that the commitment is to keep the subsidy bill at 2% GDP and less and keeping the overall fiscal deficit at about 5.1%, which means there are decisions which need to be taken and taken in good time. All I can tell is that government is determined that the fiscal deficit be contained at this level, therefore they need to attack the subsidy regime to ensure that the only those deserving will get it and not others.
If we take all these things together, you will find that government has to take decisions very fast. I won’t be in a position to tell you exactly the time line because there is a political process, but the resoluteness to ensure the subsidy goes only to the deserving. Also, to ensure that the fiscal deficit is kept under 5.1% and less is something which government is extremely serious about.
Q: When you say a decision needs to be taken fast, can we at least expect it in May?
A: I won’t be in a position to exactly tell you when because this is a political process and political decision. This has to go through consultation, which is going on at this point in time. We have to maintain the fiscal deficit at a level which we have projected, because that’s extremely important for a number of factors for the economy, and for that some decisions will have to be taken.
Q: What are you thoughts on GAAR and when we could see some sort of guidelines to take us through it?
A: GAAR is something which we need to ensure is transparent, is friendly to the people on whom it applies and has nil provisions for discretion of the tax officials. All these principles will be built into it when we are able to present this. Please remember that GAAR is something which is being practiced by a number of countries. All we need to do is to ensure that uncertainty in that goes away, and that will happen certainly.
What we are looking at more than the uncertainty is the fact that we cannot come out with rules until the Finance Bill passes that, so before that it’s too premature. But what we have done is we have had discussions and have got feedback from a number of people who have expressed some concern and some people who also want this in a much friendlier manner. So all those inputs have been taken on board and our tax people have worked on this. I am sure when you are able to see this you will find it as extremely useful and a predictable document.
Q: You have put your finger on it; it is certainty that the market seems to be wanting at this point in time. But when can this certainty come? Will it come within a week of the Budget getting passed and can you give something by way of an indication now? Also, is it possible that the anti avoidance will be resorted to only over a certain threshold limit?
A: I won’t be in a position to point out all this, you should look at the whole picture when it comes out and as soon as the Finance Bill is passed, and it should be out. But Finance Bill is a matter which has got to be debated in Parliament and it will take a view on this. But what we should attempt to do in this is that couple of things.
One is that GAAR is not retrospective, it is only prospective. Two, we are conscious that we need to create an element of certainty, the arbitrariness should go totally and it should be friendly for people on whom it is applied and also for the people to implement it. So all these principles should make it workable and friendly kind of document which will bring in the much needed certainty and it will also ensure that all its doubts are erased as and when it is presented.
Q: In your opinion, what is the extent of political reforms that we can see push through, and hence what would be the probability of that one in three chance for S&P to act on a downgrade for India?
A: Before that, let me complete on the GAAR. I mentioned it was only going to be prospective and retrospective; I hope that that message goes loud and clear. Onus of proof on the entire matter will be on the department and not on the taxpayer. These two things should really indicate the way we are thinking as we go along to ensure that it becomes very friendly and predictable and that harassment and discretion is reduced to the maximum possible extent. If it can be removed totally, yes we will still attempt to do that.
Once again please remember that these are all processes to ensure that it is friendly to the taxpayer. So that is a kind of principle under which we will be following as regards to GAAR.
As far as the reforms are concerned, you have seen the first of it coming out yesterday on the Banking Laws Amendment Bill. How fast will things roll out, which will be first etc depends on how we are able to put through things together. But on the financial sector, at least we have started with the Banking Laws Amendment Bill. The Cabinet has taken a decision on it and it has got to go back to Parliament.
So one by one it will start coming through. I think we are on the path forward as far as the reforms are concerned. Our view is that these reforms are important, not only for removing the structural rigidities in the economy, but also giving a positive signal for investors to come into the economy which is very much needed at this point in time.
Q: The other issue that S&P pointed out in considerable detail was the current account deficit. Is there anything up the government’s sleeve in terms of maybe giving more leeway to FIIs in the bond markets, either government or corporate, any other levers that you think you can open up?
A: Current account deficit comes from both the export-import trade deficit as well as the other inflows, which you have very clearly pointed out in your question. On the import side, obviously we hope that gold imports will moderate because of the taxation measures which we have taken. When the inflation comes down, as it is coming down now, the propensity to consume more gold will also go down and therefore the imports of gold will also come down.
On the oil side, obviously we think that we have presumed a very high figure of USD 120 per barrel for fiscal 2012-2013. As we go along, we think it will be less than that. As world economic outlook points out, commodity prices are going to be negative 10.3%, which means if the commodity prices go down, there is a possibility of your non-food manufacturing inflation also going down.
Number of steps which we have taken in the last two years will start yielding results on the protein food inflation, on increasing the production and the productivity of those items. So overall we think that it is possible in that sense for the inflation to be moderated. Once that is moderated and the growth returns to the 7.6% which we have projected, obviously the revenues will behave the way we have projected. Once that happens, with our resoluteness to ensure that subsidy bill is kept under 2% of GDP and less and fiscal deficit maintained at 5.1% obviously all things will fall in place. It is a number of measures to be taken on a number of front and all these things will lead to the ultimate issue of keeping the fiscal deficit and the current account deficit under the projected level.
All these issues in my view should create the kind of confidence for FIIs and FDI money to flow into the country. Incidentally, one of the figures I want to mention is that for the year 2012-2013 we have seen the highest FDI flow in the country. FII flows in the first three months of the year is about USD 12.5 billion, that is until April, as against USD 8 billion for the corresponding period of the previous year.
Q: S&P did point out that the government has been unable to move on foreign direct investment in various sectors including retail. You see FDI in multibrand retail on the radar at all?
A: The way the Department of Industrial Policy and Promotion has done good amount of consultation with number of stakeholders. That’s a decision which is very important and crucial and I am sure that’s the way to go forward.
Q: The other point of worry has been the rupee and the depreciating trend that we have been working with. What is your sense in terms of what we could see on the rupee going forward and what exactly has happened till now?
A: The move of the last few days could perhaps be due to some excess demand on payments which the oil companies would be making. I think that would kind of mean it will come back to a fairly reasonable level. But it’s difficult to say what should be the exact number.
But the range which you have been seeing for the past 10-15 days is perhaps a reasonable level. But one needs to see how the demand for foreign exchange. These peaks would always be there and the Reserve Bank of India has certainly a policy to smooth out these violent fluctuations. That I think is possibly the regime that is likely to be in the near future.