Downgrade threat reflects fiscal deficit concerns: Fitch

Speaking to CNBC-TV18, Art Woo, Director in Fitch's APAC Sovereigns team said the key concernes revolve around lack of reforms and weak fiscal deficit. He said the government is unlikely to meet its fiscal deficit target for FY 13.

Most economists have stated India's fiscal deficit for this fiscal is going to be much higher than the government's estimate of 5.1%. Fitch has pegged FY13 fiscal deficit at 5.6%.

Below is the edited transcript of Woo’s interview with CNBC-TV18.

Q: What exactly is your rating outlook on India? How much would you give before, how much time would lapse before you start taking a view on the deficit number and take a decisive stand on the rating?

A: You are quite well aware we revised our work on India’s long term rating to negative from stable back in the middle of June. So, that decision was made with respect to the fact that we are concerned about India’s medium and long term growth potential.

If the whole issue of structural reforms wasn’t hastened then how it could protect the economic environment. So, there has been no change since then and that rating indicated that in the next 12 to 24 months there is a strong likelihood that India’s ratings could be down graded if the situation continued at the same pace.

Q: I am asking you for the time element because it is quite possible that by December or January you will know that India’s fiscal deficit is perhaps not 5.1% but close to 5.8% which many analysts are now pegging it at. If that were to happen would that be an event significant enough for you to hasten this decision of downgrade?

A: That is always a possibility, but as I mentioned to you before we have a 12 to 24 months time. It is not a hard and fast rule; our decision could change for the positive or the negative.

There are number of moving parts in the equation and public finances are just one of those factors. Although it is a factor that we are watching closely because public finance is the key factor driver in sovereign creditworthiness.

Q:  What are the key events on the positive and negative side that you are watching out for one of the key concerns are structural reforms and with the new finance minister which key reform could possibly change your mind in terms of or possibly move to a lesser chance of a downgrade what would those key reforms be in order of priority which you would like to see?

A: To be quite frank we are not in to prescribing policies, but our market strength is about to see whether the reforms that they do are in place, whether that helps the structural environment particularly with regards to the overall investment climate, which could help infrastructure investment.

Anything that could help to bring improvement or decline in structural inflation would be positive development. Secondly, anything that helps the fiscal position and also better fiscal sovereign creditworthiness.

Q: What are you working with in terms of GDP growth for the current year and if you have a quarterly trajectory as well?

A: Our base case right now which we aligned back in the middle of June was 6.5% for the fiscal year.

Q: You have not revised that or the quarterly?

A: No, We haven’t made any revision since then.

Q: Anything in terms of the fiscal deficit number that you are working with, current account deficit number that you are working for FY13 in terms of projections at this point in time?

A: Our base case that we outlined was that we expected the Indian budget, central government fiscal position to come in about 5.5%-6% so, so we were factoring in that the government could meet its 5.1% target.

There are factors that are putting pressure on the fiscal that relate to, in the pace of economic growth, revenues, tax revenues. Secondly, subsidies don’t remain an issue and we will be watching that closely.

Q: What is the current account deficit that you are working with?

A: The current account deficit that we are working with in terms of our base case is around 3.8%, so slightly down from fiscal year 2011-2012.