India still riskier than peers despite reforms move: Expert

According to Foulis, it is important to recognise that India doesn’t really have the benefit of doubt right now in terms of its credit rating. Even though things have improved in India over the last few days, India is still viewed as riskier as compared to its peers and that does reflect its pretty horrible fiscal situation.

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“The paradox, however, is that India has continued to attract some foreign equity inflows throughout this year. With the Federal Reserve having embarked on another round of quantitative easing which tends to see money flow into emerging economies, it could be in the short-term the country does continue to attract some foreign money,” he added.

Below is the edited transcript of the interview

Q: What has the global reaction been to the kind of turn in events that we have seen politically over the last 48 hours?

A: There is a mixture of hope and concern; there is hope that this modest package of reforms will get the ball rolling again but also concern that it has exposed fragility of politics. The outside world and the credit rating agencies who have a role to play here hope that you see a sustained package of reforms and a political environment that supports more reforms. What has been announced so far is really quite small. India is still expected to have a pretty big combined fiscal deficit of about 9%.

Likewise, I think the rule tweaks for FDI in retail and aviation are not going to result in massive inflow of funds. The reforms, in themselves, are a first step. What people will be concerned about is even this first step has proven tremendously difficult politically.

Q: What would worry global investors and rating agencies more, would it be the prospect of some kind of rollback in the recent diesel price hike or do you think it would be the prospect of carrying on support from some parties which might be seen as hobbling the government on taking more risk going forward?

A: It is important to recognise that India doesn’t really have the benefit of doubt right now in terms of its credit rating. Any form of status whether it is with the existing coalition partners or with support from outside to coalition, any form of status-quo, which is essentially muddling through, will be good enough. If you look at India’s credit rating, the country is really an outlier compared to its peer group in the big emerging market economies.

If you look at Brazil, Russia, South Africa have credit default swaps, which is a measure of risk considerably lower than India’s. They have much lower government debt and much lower government borrowing. I think it would be a mistake to assume that if the government stumbles on either with Trinamool or some other formulation in parliament that will be good enough to avoid a credit rating downgrade.

Q: What is your sense of how India is being looked on relatively now in the whole BRICs basket? Did hopes get raised with the action of the last couple of days or in any case, people were more bullish on India in a relative world compared to peers like Brazil, Russia and China?

A: There are two separate things to look at, one is the immediate reaction and actually to go back to the credit default swap market, which is trying to catch financial risk. India has seen a huge improvement in the last few days. Having said that India relative to that peer group is still viewed as significantly riskier; in fact riskier than Indonesia. Things have improved but in absolute terms, I think India is still viewed as riskier and that does reflect its pretty horrible fiscal situation.

The paradox, however, is that India has continued to attract some foreign equity inflows throughout this year. With the Federal Reserve having embarked on another round of quantitative easing which tends to see money flow into emerging economies, it could be in the short-term the country does continue to attract some foreign money.

But it would be too complacent to assume that it continues. Given the size of India’s current account deficit, it needs to think about long-term ways of improving confidence, and again, that does come back to long-term series of structural reforms rather than this more piecemeal approach.