India has not averted rating downgrade: Shankar Acharya

Shankar Acharya of ICRIER says too much has been made out of Standard & Poor's warning yesterday, that there was a significant chance that India's credit rating may be lowered if its external position deteriorated, political climate worsened or fiscal reforms slowed. 

In fact, S&P made it clear that it had not issued anything new on India's sovereign rating but only published the Asia-Pacific sovereign report card, which does not have any new information on India's rating, Acharya told CNBC-TV18. "This is similar to the warning that the agency had released in June this year," he pointed out. But the news flashed by agencies was strong enough to spread panic which pulled down the stock market by over 100 points at one point of time and hurt the rupee as well.

But clearly there are uncertainties, Acharya acknowledged, adding he sees does not see investment cycle turning around in the near-term. "If the oil price moves a little bit upwards -- Rs 5 adjustment that has been done on diesel and on LPG can be washed out straight away from there. So, you don't have to wait till the so-called populous budget of next February," he said.

He said all these issues -- in terms of high levels of market borrowing, high levels of interest rates, lot of pressure on inflation etc -- will certainly keep the sword of downgrade hanging on the country. "Yes, the story is still not anywhere close to done."

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

Q: How have you taken in or soaked in the measures since September? Are you encouraged or you still expect a lot more?

A: I strongly welcome what was done on September 13 and 14 in terms of increase in diesel and LPG prices and the follow up reform measures on FDI in retail, aviation and so forth. I am also very welcoming of several things that have happened since, including steps towards resolution of the state power sector dues problem.

Last week we had the slew of cabinet approvals on long pending legislation in the financial sector with respect to insurance, pensions, the amended Companies Bill and the likes.

It is very good to see the government very active over the last month in taking policy steps of various kinds. That contributed to buoyancy in the marketplace, rise in the currency and has clearly had a positive impact in the short run on expectations. That’s the positive side, but it will be fair to say at the same time that if the fiscal correction and reform type measures stop here, then we are a long way from where we need to be.

If you take the fiscal correction, the estimates vary. Of course what happens on the international prices for oil influence it hugely, but rough calculations would be it cannot be more than 0.2 percent of GDP decline in the Subsidies Bill.

The Kelkar Committee most recently estimated that the major subsidies bill for the central government for this year would be not the 2 percent that had been hoped for in the budget, but more like 2.6 percent of GDP for the year. If you shave off 0.2 percent you are still at 2.4 percent, which is very much on the high side.

There are a lot of other steps that have to happen. Kelkar Committee talks about fertilizer price increase, issue price for food from public stocks increase, expediting PSU disinvestment in many ways and number of other measures - none of which so far looks that imminent. They might happen, I do not want to rule it out, but they do not look imminent.

The picture on the fiscal side is some welcome correction. Many people have recommended for years in committee after committee report, if the government now from hereon keeps doing small upward adjustments periodically, in say the diesel price and in the LPG price and so forth then we have a system in place, which will gradually reduce the major subsidies.

You have to do something similar on fertilizer and food, which are perhaps more difficult in some ways. If it doesn’t happen we have a big fiscal problem and my own view is that if I had to guess the fiscal deficit for the center this year is still likely to be something like 0.5 percent of GDP over what was budgeted. For states and center together, we are still high at close to 8 percent of GDP if my guess is right. That’s on the fiscal side, some correction, but a lot more needs to be done.

On the reform side, these were good signals, pro-reform, pro-investment and it certainly changed the dynamic of expectations, but in themselves, I don’t think they are going to bring about a turnaround in investment on the ground in areas that matter, whether this be power or coal or telecom or mining or roads or ports or industry. It will contribute in a positive way to the atmosphere, but I don’t think we will see a big difference in the growth rate this year because of the measures taken already. Will it impact possible growth in future years?

In one sense, yes, if these measures had not been taken then we were on a clear downward slide, so perhaps it helps to put a break on that. But will it really change things around, so that instead of growth hovering around 5 to 6 percent we are suddenly back in the 7-8-9 percent range, I doubt it if this is where it stops. If a number of other measures are taken such as pushing through on GST to conclusion a few short months from now that’s a different story. That can have a more important impact.

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Q: The rating agency S&P seem to echo your sentiments about the fiscal deficit issues yesterday – one fear is that 0.2 percent adjustment which might has happened as you eluded to might easily be undone in the coming budget by populous measures like Food Security Bill as we roll forward close to elections – do you have that fear that some of the good work now might actually be compensated in a sense in a few months time?

A: You don’t want to say compensated, you may say undermined. My impression on the S&P has been reported in today’ papers - a careful reading of the newspaper suggest that there is nothing new in this. In fact S&P has made a statement saying that there is nothing new in this. They are simply reflecting what they had said earlier in this that they had one third probability or possibility of a downgrade. I don’t think they have actually done a fresh exercise leading to a fresh assessment post measures taken in September at least that is my understanding.

The issue of petroleum price increase and Shome and whether this could be undone in the next budget but clearly they can be undone if it goes for populism. Even before that we don’t know what is going to be the trajectory of international oil prices. One can argue that some factors point to reduction in oil prices because global growth is still sluggish. If you look at the IMF’s recent world economic outlook they are rather bearish.

On the other hand, others think that global growth will pick up and there also some uncertainties probably less than 2 months ago on what might happen with respect to Israel, Iran and so forth. If the oil price moves a little bit upwards – a Rs 5 adjustment that has been done on diesel and on LPG can be washed out straight away from there.

You don’t have to wait till the so called populist budget of next February. But clearly if either of these things happen, then we are back to where we were as far as the fiscal situation is concerned. With all that it entails in terms of high levels of market borrowing, high levels of interest rates, lot of pressure on inflation and that sort of thing will certainly strengthen pressures for downgrade. The story is still not anywhere close to done.

Q: Inflation still remains very high but the Reserve Bank of India is saying for the last many months that there needs to see some fiscal adjustment from the government before it even considers looking at reducing rates – do you think it will be encouraged enough by what it has seen in September from the government?

A: When the government did push through the measures of September 13 on diesel and LPG – following that, in their mid quarter action the RBI reduced the CRR by quarter of a percent so in the sense of pumping in liquidity. In a sense you saw some modest coordination - okay government you have done something to tighten fiscal policy, we will do something to loosen monetary policy.

Now whether in the forthcoming quarterly assessment at the end of this month what will happen, I shouldn’t really speak on that since I am the member of the external Advisory Committee on monetary policy for the RBI. There is no certainty that it will move to cut interest rates, repo rates and so forth. From reading of the newspapers, there seems to be a quite enormous pressures emanating from the finance ministry on the RBI to do something, but whether it will do it, whether it will be a good idea – let us see.