Fisc & macro economy risk points for India downgrade: S&P

Takahira Ogawa, director- ratings at Standard & Poor's says that India is likely to grow slower than normal in the near-term, but no rating action is expected currently. "If, for example, fiscal conditions cannot be addressed by the next budget, or the macro economic conditions become worse than we expected in next one year or two, then there is a possibility for us to consider whether to change the outlook or indeed the rating itself," he says.  

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Are you confident that the growth story in India is intact and therefore there is no danger to your current ratings of India or are you worried about some factors?

A: I think that in terms of medium-term growth of India, I can have a reasonable confidence that India can grow at a reasonably good pace, but if you look in very short period of time, because of the economic cycle and external environment, sometimes the growth will be slower than normal. Perhaps the last half of the year and then next half of year, the pace of the economic growth in India could be a little slower than last few years. 

Q: Should we expect a rating action anytime soon? What might propel a rating action? At the moment it's a stable outlook BBB minus, isn't it?

A: Yes, as we wrote in our reports which had been published just now that at this stage we don't expect anything to change, including the outlook attached to sovereign rating of India. But if, for example, fiscal conditions cannot be addressed by the next budget, or the macro economic conditions become worst than we expected in next one year or two then there is a possibility for us to consider whether to change the outlook or indeed the rating itself. But at this stage as I mentioned we don't expect anything to happen in near future.

Q: What would you expect from the budget? Are you looking at 5.5% fiscal deficit or 5% fiscal deficit? Is it a number you are looking for? What kind of a number might make it a negative outlook and what might let it leave it as it is?

A: I think it's a combination of the macro economic growth, particularly the nominal GDP growth ratio and the government commitment to the fiscal consolidation.

Obviously, this fiscal year the government will overwhelm the deficit compared to the initial front, but how to really address the issue in the next budget is very important.

On the other hand, in terms of the macro economic growth, it's really been faster than expected macro economic growth, the level of the fiscal deficit might be a little better than even the budget assumption. So the two things are very important. Also, in terms of the inflation and government cost of funding of the bonds is also another important function.

Q: The current India stable rating is on the expectation of a strong economic growth in the medium-term and gradually improving fiscal performance. So, could you tell us what the current expectation is? How much lower does the growth need to go? If it dips to 6% do we reach that tipping point in terms of growth and even fiscal consolidation and political inaction?

A: I think at this stage, we expect that the real GDP growth ratio in the medium-term in India is perhaps higher than 7%, some might say 7%, that's the current expectation. For a few years, if the real GDP growth rate comes down below 6% for example, that will put pressure on the fiscal position of the government on two fronts because though our macro economic growth means that lower increase of the government revenue, on the other hand, the government need to have more expenditure in order to mitigate the lower growth rate of the country. So that's one of the issues.

The other issue is fiscal consolidation. Based on the Thirteenth Finance Commission's recommendation, government has been on the track of the consolidation of the fiscal position, but perhaps this year, the pace of the fiscal consolidation could be substantially slower than last year. So in a sense, how to push this situation back on course to the recommendation of the Thirteenth Finance Commission in the medium-term is very important for us.