Negative trends in India won't sustain for long: Moody's

Even though rating agency S&P has revised its outlook to negative on India, Moody's thinks the sub-continent still has potential for growth. Atsi Sheth, Senior Analyst, Sovereign Risk Group, Moody's Investors Service feels that though there are negative trends but those will not sustain for long period.

Moody's has a BAA3 rating with a stable outlook. Explaining ‘stable outlook’, Sheth said that India’s credit metrics when compared to the credit metrics of other countries that are rated BAA3 they remained within the range that is consistent with a BAA3 rating.

However, there are grey cloud overhangs as she points out the negative trends on growth and deficit. "We clearly see negative trends in terms of growth, fiscal metrics and current account balance as well. Some of these negative trends were anticipated in the Baa3 rating," she said in an interview to CNBC-TV18.

Below is the edited transcript of her interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Why did you choose to not change your outlook? S&P did, but Moody’s clearly held its own outlook. Why the difference in view?

A: I can only speak about our view. Our outlook on the BAA3 rating for India is currently stable. What our sovereign rating methodology does is assesses India’s credit strengths and weaknesses on a global basis and on a forward looking basis. So, stable rating outlook is telling that India’s credit metrics, when they are compared to the credit metrics of other countries that are rated BAA3, they remained within the range that is consistent with a BAA3 rating.

The stable outlook is also telling that we clearly see negative trends in terms of growth, in terms of the fiscal metrics as well as the current account balance as well. Some of these negative trends were anticipated in the BAA3 rating. We had said for a decade now that India’s key credit constraint is its weak government finances. So, what we have been seeing in terms of the fiscal outcome validates what we have been saying for a long time. We don’t see this as a new development. We just see it as a validation of a previous assumption that we made about the BAA3 rating.

In terms of the growth outlook, clearly growth has decelerated over the past several quarters. We anticipate that this deceleration is not going to recover very rapidly. At the same time, we don’t expect it to be perpetual. So, our stable outlook incorporates what we see not just in the next quarter or two, but in the next 12 to 18 months. We do see a recovery there. So, that’s one reason why the outlook is stable.

Lastly, in terms of the some of the shocks that have affected India’s balance of payments, one is the oil price shock. The other is global risk aversion which has affected capital flows. This is not really unique to India. So, you see this affecting other countries elsewhere in the world.

The impact on India maybe a little bit exacerbated because India is both an energy importing country as well as a capital importing country and currently both those markets have a high degree of uncertainty around them. So, we recognise that. But we don’t see this as moving India’s credit metrics far beyond the pale of what’s consistent with BAA3 rating at this point.

Also read: 6 key policy reforms that may save India from downgrade

Q: Moody's as well went onto observe that they are quite concerned about the political gridlock India has at this point. As one economist pointed out, it’s not that the problems are not known or the solutions aren't, it’s just that policy implementation has been so lax on this country. Would you say the political or policy risk has gone up over the course of the last few months?

A: This is something that is germane to one of India’s credit challenges and has been the case not just recently, in recent months, we seemed to be hearing a lot more news about it certainly. But if you look at past several years and you look at even the years of high growth, 2004-2008 for instance and you look at the structural policy changes that were undertaken then there wasn’t a lot of movement.

One example is FDI in retail for instance. This is something that’s been on the policy agenda for a very long time. The GST and the Direct Tax Code have been on the policy agenda for a very long time. So, it’s not like these policies suddenly began to falter in the last three or four months. This has been years in the making that policies move very slowly in India. There is sometimes one step forward, one step back process.

Yes, the nature of the political economy in the country does affect the way policy moves. So, we do see policymaking as a constraint on the rating. However, we don’t see it as the new constraint, we see it as a constraint that’s always been there.