Overshooting fiscal deficit won‘t hit India rating: Moody's

Atsi Sheth of Moody's Investors Service feels meeting fiscal deficit target of 4.8 percent remains a challenge for India. As per the latest data released by the Controller General of Accounts (CGA) on September 30, 2013, fiscal deficit has already reached 74.6 percent (or Rs 4,04,651 crore of the targeted Rs 5,42,499 crore) of the full year target, as on August 31, 2013.

However, breaching fiscal deficit is unlikely to change India’s rating, she told CNBC-TV18 in an interview. Unlike Moody’s, Fitch feels overshooting fiscal deficit target raises possibility of credit rating downgrade.

Since India’s current account deficit is dependent on oil prices, easing of global crude prices has added to the belief that CAD is headed lower. Like most experts, Sheth also expects FY14 CAD to be lower than FY13. Recently, PMEAC chairman Dr C Rangarajan also said, with trade deficit for September falling to USD 6.76 billion from USD 17.15 billion a year ago, FY14 CAD may be even lower than projected USD 70 billion.

The data also showed that exports in September rose 11.15 percent to USD 27.68 billion. According to him, the export data reflects a gradual pick-up in global demand.

Meanwhile, Moody's has a negative outlook on Indian banking sector and cautions that asset quality weakening is a cause of concern for the sector.

Below is the edited transcript of Atsi Sheth’s interview with CNBC-TV18

Q: What was your reading on trade deficit data for the month of September?

A: We would agree that it was better than estimates, but in terms of strength not particularly surprising. Exports are reflecting a gradual pick up in global demand. Imports are reflecting both the effective exchange rate depreciation as well as some of the curbs that were placed on gold imports. All of that is adding to a narrowing of the trade deficit, which one should expect given the slight pick up in global demand and a slight downturn in domestic demand as well along with all the measures that government has implemented to curb the trade deficit.

Q: Do you then think that the trade deficit data will be better than the estimated USD 70 billion for FY14?

A: Whether it is at USD 70 billion or above or below depends on a couple of different things. First and most importantly, for India is what happens to oil prices. A few weeks ago, there was concern that global geopolitics could affect oil prices in the future. That concern seems to have abated, but if it revives, oil prices would be one driver that would widen the trade deficit. The other driver would be how gold demand behave during the festive season and the wedding season in India because that is another driver of widening the deficit.

On the flip side, it depends on how global growth goes and whether that continues to be supportive of Indian exports as it has been or not -  our base case is that it will probably continue to be mildly supportive, so that will help exports grow. However, it is how oil and gold behave particularly in the next three months in terms of gold as the festive season and the wedding season kicks up, that we will be monitoring. Compared to last year, the current account deficit (CAD) is likely to be lower as a percentage of gross domestic product (GDP) largely because again the impact of the depreciation is feeding in, the impact of import curbs on certain commodities is feeding in as well.

Q: One gaining view is that CAD is now a problem of the past. Let us focus on fiscal deficit. Is there a threat of that breaching 4.8 percent mark?

A: We have always felt that it would be challenging to meet that deficit target because India’s fiscal deficit more so than many other countries tends to be very sensitive to growth trends. In all countries deficits are sensitive to growth trends, but in India the revenues tend to be effective much more and expenditures are quite rigid. So governments cannot cut down expenditures as much when the revenues go down. That is what we are seeing in India right now that tax revenue growth is low because growth itself is low.

On the other hand, expenditures particularly on those commodities that are sensitive to inflation or to the exchange rate, that burden has gone up. We do believe it will be challenging to meet the 4.8 percent deficit. However, last year what the government did was that cut down a lot of different types of discretionary expenditures on capital investment for instance and that could be one way of bringing the deficit back to the 4.8 percent level if the government chooses to do that.