‘Weak fiscal settings weigh on India’s ratings’

As we step into 2016, the big disappointment has been on the government’s reform pace with a shadow looming large over the GST Bill. What's the road ahead for recovery and what does this mean for India’s rating outlook? Speaking to Bloomberg TV India, Standard & Poor’s Director Kyran Curry explains why GST is important for improving India’s government finances and rating outlook.

Are you encouraged by the news that there could possibly be a breakthrough on the GST front?

I see the beginning of India’s governing parties making modest progress in building a consensus on initiatives and the passage of law to address the long-standing impediments to India’s growth.

This includes, importantly for us, improving things like India’s tax system, its energy market and other things like strengthening the business climate through simplifying regulations and improving contract enforcement and trade. And, for us, as we head into 2016, we believe it is very important for these reforms to gather some pace and momentum because ultimately we see it promoting stronger economic growth and more economic flexibility and ultimately also helping to improve government’s public finances over time.

Do you think there is a risk to medium term fiscal deficit targets given the need for government expenditure to get growth going?

Yes, we do. One of the things that we monitor closely is the condition of India’s public finances. One of the factors that indeed weigh on the ratings is the relatively weak fiscal settings. So that’s another way of saying India has a very strong and long tradition of running relatively high fiscal deficits, which has led to the accumulation of moderate debt. So, this is something that we see ultimately constraining the government’s ability to provide support should there be, say, a weakening of the growth outlook.

And India’s got, as we see it, amongst the highest debt burden amongst any sovereign that we rate in Asia Pacific region. What we are kind of looking for over the medium term would be for the government to follow through on many of its fiscal targets and move to consolidated fiscal position.

Considering there was moderation as far as meeting the FRBM targets for this year, would there be concerns next year that if this has been compromised further?

Yes, that is true. I think as we see it in itself, a slight blowout in the fiscal deficit won’t bring pressure on the ratings. But for us, it really says that the government efforts to consolidate fiscal position target would be further delayed. And for us, this is something that may link them at a time which may take India to achieve a positive outlook or ultimately an increase in its ratings.

Where do you see growth next year then?

We have updated our growth forecast actually. It is 8.2 per cent next year and then 8.3 per cent the year after. These are very impressive growth numbers.

India, by our book, is the fastest growing large economy and despite the fact that we observed significant infrastructure shortfalls in the area of energy and transport infrastructure in particular, the growth story in India remains very promising.

And another thing that I guess separates India from its peers is that much of the growth is driven by the domestic economy, which means that this sovereign is not particularly reliant on external trading partners’ demand, it is not reliant on external savings to fund its growth, it is much more attuned to the events that are happening in the domestic economy to keep that growth going. And I guess if we see further progress in the government and in the private sector closing some of these infrastructure gaps, there’s possibly even further upside to the growth outlook.

Do you see risks to rating or even on the upside, what you really watching out for?

I think on the upside we will be looking for a momentum in the reforms that we have talked about. If the government improved the pace further, then that would be undoubtedly a positive development for India to the extent that it may promote an either high growth outlook than just a shade and at the same time it may assist the government in growing its revenues and stabilising its fiscal position overtime.

But the converse of that is, if we see a waning in support for the government reforms and if that momentum drops off such that the government runs even higher deficit that creates more borrowings that may bring downside risks to the ratings. But for the moment we see the government continuing to progress on these reforms.

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