Too pessimistic

Rating agencies are often accused of failing to foresee emerging risks in their credit assessments. This could be the reason why Standard & Poor’s has taken such a pessimistic view of India in its recent report. Warning that India’s public finances were “less than rock solid” due to “long-standing cracks in the budgetary system”, S&P predicted that fiscal improvements in recent years could “unwind because of a financial or commodity shock”. Identifying high subsidies and interest burden as key constraints, it has urged subsidy and debt reforms to increase public spending and kick-start the economy. This is in direct contrast to Moody’s, which only a week ago said there was room for a ratings upgrade in the next 12-18 months on the back of recent policy initiatives that could accelerate growth. Of the two, Moody’s assessment seems to be more grounded in reality. While it is nobody’s case that India is immune to external shocks, the Modi government — despite giving itself some fiscal space in the last Budget — has not abandoned prudence and has initiated measures to trim populist subsidies on fuel and food while opening up several public projects to private capital. These initiatives need time to bear fruit.

S&P draws attention to high food and fertiliser subsidies for FY16 and cautions that a sudden spike in commodity prices may escalate the bill. But by phasing out diesel subsidies and moderating excessive hikes in minimum support prices, the Centre has already initiated substantive reforms on both fuel and food subsidy. More food subsidy reforms are on the way, with the government-appointed Shanta Kumar Committee recently recommending decentralised procurement, lower subsidy coverage, and direct benefit transfers to the poor. The rapid rollout of Jan Dhan-Aadhar has made such reforms easier to implement. On government debt, S&P worries that short-term spikes in interest rates may balloon interest payouts. While India’s debt indicators compare poorly to other emerging markets, the RBI and the Centre have been alive to this and have taken active steps to reduce short-term borrowing. Sovereign debt indicators have been on a largely positive trajectory between FY10 and now, with government debt to GDP falling from 54.5 per cent to 48.3 per cent, its weighted average cost at 7.8 to 8.1 per cent; moreover, less than 5 per cent of the debt is due within a year. Recent moves to reduce bank SLR requirements, allow bank infra bond issues, and allow private funding of railway projects, also point to the Centre reducing its role in bankrolling large projects.

Yes, lower-than-expected tax collections or a failed divestment programme can make budgetary calculations go awry. But revenue buoyancy is a function of economic growth rather than reforms. If the Indian economy, helped by pro-business policies, does manage to rev up its economic growth this fiscal, it will — in a dismal global environment — attract sufficient foreign capital to shield the fisc and currency from external shocks, never mind the fiscal indicators.

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