Ratings agency Moody's says that it maintains a stable outlook for India. Though Moody's is concerned about the government's populist measures, it does not think that these policies warrant a downgrade yet. Moody's senior economist Atsi Sheth expects even if the deficit was missed by a 0.1 percent of GDP, that number would have been within the rating agency’s range. “So, it would not have been a factor that would rive a rating change by itself,” he told CNBC-TV18.
Below is an edited transcript of the interview on CNBC-TV18
Q: The government is expected to better its own fiscal deficit target of 4.8 percent? Sources tell us it could perhaps even come in closer to 4.65 percent. Does this put the rating downgrade fears on the backburner?
A: From our perspective, we have a stable outlook on the ratings. We did not anticipate a rating change imminently. You were saying about meeting the deficit target or even bettering it slightly. It is not very different from what happened last year as well. This is something that isn't particularly surprising development.
I would say this is something that is within our expectations. We expect that even if the deficit was missed by a 0.1 percent of GDP that number would have been within our range. So, it would not have been a factor that would rive a rating change by itself.
Q: What are your expectations as far as GDP growth is concerned because we have seen the government embark on a fairly significant or severe expenditure cut programme. How is that going to crimp GDP growth?
A: We do have a 4.5 percent estimate for this year. That is the year that ends in March. Just like it happened last year when expenditure was squeezed in the last two quarters and you saw the impact on the GDP numbers, we think that the same thing will happen. What that does is it not just affects this years GDP numbers because if government's investment expenditure is lower it affects future GDP as well and so our sense is that not only will this year's numbers come in at 4.5 percent but the next two quarters might be subdued as well because of the fiscal consolidation effort.
Q: How worried are you about the government's populist measures? We just heard from the government today that the subsidized LPG cap is going to be increased from 9 to 12. What impact do you think these populist measures are going to have on the economy and do you believe that this could warrant perhaps a re-look as far as the rating is concerned?
A: Fiscal has been a long term constraint on India\\'s rating and this is one of the reasons why India's rating even when growth was good, even at 9 or 10 percent was not upgraded beyond BAA3 because there is a propensity for policy actions that increase expenditure without any countervailing actions on the revenue side. This is not just a pre-election concern but one that has been long term and certainly it has heightened at this point. So, it is something that we anticipate that there will be measures that will likely and last year the food security bill is something that added long term expenditure to the government's balance sheet without any countervailing revenue and the same thing is happening now.
We will monitor the extent of the expenditure commitment and take an action based on that. At this point this is within what we had anticipated.
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