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In an interview with ET Now, Atsi Sheth, VP-Sovereign Risk Group, Moody's, talks about the larger outlook for the Indian economy and various other parameters. Excerpts:
We did see the rupee breaching the 50 levels. In fact, it is closer to 51 as we speak. Would you say that you would look to revisit your ratings as far as the Indian economy goes, especially on the current account deficit front given the fairly weak macroeconomic outlook?
When a country's currency depreciates, it could be for a variety of reasons. It could be because the current account deficit is widening as it is in India, which means that importers are demanding more foreign currency and exporters are not earning as much foreign currency, and the other reason could be that portfolio flows which tend to raise the value of your currency when they are coming in strong are weak right now. So those are the two reasons that are leading to a decline in the value of the rupee.
One is global risk aversion, which has not specific to India but really things happening around the world, and the other is the fact that India's growth is domestic demand driven and hence import growth tends to be stronger than export growth in the best of times and in the worst of times.
Since this is already something that has been incorporated into rating, I do not think depreciation in the rupee for those reasons would be reason to change our outlook on the rating. If, however, we found that the depreciation is because of other reasons that are recognition that the structural profile of growth in India is in trouble, then we would start being concerned. But at this point we really think that the depreciation is cyclical given by global factors and not due to some problems in India's long-term growth profile.
Just but just want to get you a sense of what you make of the contagion effect of the Eurozone fallout on emerging markets particularly India?
During the last global financial crisis, that was in 2008-2009, people found that India was relatively insulated from the global growth downturn. Growth did a little bit less than it did in other emerging markets and it recovered a lot faster than it did around the world. So India was insulated. The question now is now that as we are going through another global growth downturn, will India remain as insulated? And to answer that you really need to take into account three things. Two things are different than they were in 2008 and one thing is the same.
Of the two things that are different, the first is fiscal policy. In 2008 the budget deficit was much narrower then it is now actually and so the government was able to stimulate its way to growth. It was able to cut taxes a little bit, it was able to spend a little bit more and so fiscal stimulus really helped growth and the recovery in growth that is not the case now. The fiscal deficit is already wide, the government is trying to actually narrow it. So perhaps that kind of fiscal stimulus cannot be expected this time around.
The second difference was that business confidence in India was quite high in 2008 and global business confidence towards India was also quite high in 2008, that seems not to be the case now. If you ask people around the country, you get the sense that business confidence is actually quite low and people are looking for ways to recover this business confidence, but not finding it. Similarly global attitudes towards India have taken a little bit of a hit over the last year I think thanks to corruption scandals, thanks to sort of there are not being any policy impetus to invite for an investment.
So that is the other thing that is different between 2008 and now which makes recovery that much more difficult. There is one similarity in 2008 monetary policy was very tight, interest were high so simply by lowering interest rates you could trigger a recovery, you could bring down borrowing cost for consumers, you brought down borrowing cost for investors and that is what led to a recovery.
This time around I feel it is the same thing that is going to happen. We hear that monetary policy has peaked. It probably has, and if indeed rates start to decline over the next year, I think this time next year you will probably see both consumption and business investment recovering. So India is perhaps still insulated because it does not depend as much on exports for its own growth, but the fact that its domestic demand is still dependent on a little bit of fiscal stimulus and business confidence, that might make the recovery a little more challenging this time around.
How much worse do you believe the fiscal deficit can get against the projected 4.6% of GDP and again what is the sort of tax revenue growth that you are pencilling in?
The fiscal deficit is targeted at 4.6% and the consensus now is that target is not going to be met and we agree with consensus on that. Again the consensus view is that the actual deficit will be somewhere between 5% of GDP and 5.5% of GDP and we have no reasons to disagree dramatically with that assessment. So we do think the target will be missed and this means that borrowing cost will probably stay high for the government in the near term.
In terms of revenue growth, in India revenue growth is co-related with the way the nominal GDP grows and more importantly the way profits and wages grow because that is how your corporate income tax comes in and at the beginning of the year people had simply assumed a higher rate of GDP growth which assumed a higher rate of profitability that has not turned out to be true. So we do expect that the revenue targets as well will be missed.
Just a final question then do you see the downside risk to GDP forecast of around 7.5% for FY12 still now that the monetary tightening is widely expected to be at its peak?
There is always a downside risk to GDP growth when you see global growth being revised down again and again as we are seeing now and also the fact that we talked earlier about business confidence that business confidence has yet to recover. So given that yes there is some downside risk. We have already seen the high frequency data which is the PMI data that comes out, the IIP data that comes out. That shows that particularly manufacturing is feeling the brunt of this tightening monetary policy.
So yes, there is a mild downside risk. From a sovereign rating perspective, do we worry inordinately about it? No. I would say if growth is a tad lower than say 7% or 7.5%, I do not think that changes our view that in the long term. India actually has the growth potential and will continue to retain that growth potential, thanks to its demographics, thanks to the existence of an entrepreneurial spirit and thanks to savings rate that is able to fund that growth. So those three things have not really changed.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In an interview with ET Now, Atsi Sheth, VP-Sovereign Risk Group, Moody's, talks about the larger outlook for the Indian economy and various other parameters. Excerpts:
We did see the rupee breaching the 50 levels. In fact, it is closer to 51 as we speak. Would you say that you would look to revisit your ratings as far as the Indian economy goes, especially on the current account deficit front given the fairly weak macroeconomic outlook?
When a country's currency depreciates, it could be for a variety of reasons. It could be because the current account deficit is widening as it is in India, which means that importers are demanding more foreign currency and exporters are not earning as much foreign currency, and the other reason could be that portfolio flows which tend to raise the value of your currency when they are coming in strong are weak right now. So those are the two reasons that are leading to a decline in the value of the rupee.
One is global risk aversion, which has not specific to India but really things happening around the world, and the other is the fact that India's growth is domestic demand driven and hence import growth tends to be stronger than export growth in the best of times and in the worst of times.
Since this is already something that has been incorporated into rating, I do not think depreciation in the rupee for those reasons would be reason to change our outlook on the rating. If, however, we found that the depreciation is because of other reasons that are recognition that the structural profile of growth in India is in trouble, then we would start being concerned. But at this point we really think that the depreciation is cyclical given by global factors and not due to some problems in India's long-term growth profile.
Just but just want to get you a sense of what you make of the contagion effect of the Eurozone fallout on emerging markets particularly India?
During the last global financial crisis, that was in 2008-2009, people found that India was relatively insulated from the global growth downturn. Growth did a little bit less than it did in other emerging markets and it recovered a lot faster than it did around the world. So India was insulated. The question now is now that as we are going through another global growth downturn, will India remain as insulated? And to answer that you really need to take into account three things. Two things are different than they were in 2008 and one thing is the same.
Of the two things that are different, the first is fiscal policy. In 2008 the budget deficit was much narrower then it is now actually and so the government was able to stimulate its way to growth. It was able to cut taxes a little bit, it was able to spend a little bit more and so fiscal stimulus really helped growth and the recovery in growth that is not the case now. The fiscal deficit is already wide, the government is trying to actually narrow it. So perhaps that kind of fiscal stimulus cannot be expected this time around.
The second difference was that business confidence in India was quite high in 2008 and global business confidence towards India was also quite high in 2008, that seems not to be the case now. If you ask people around the country, you get the sense that business confidence is actually quite low and people are looking for ways to recover this business confidence, but not finding it. Similarly global attitudes towards India have taken a little bit of a hit over the last year I think thanks to corruption scandals, thanks to sort of there are not being any policy impetus to invite for an investment.
So that is the other thing that is different between 2008 and now which makes recovery that much more difficult. There is one similarity in 2008 monetary policy was very tight, interest were high so simply by lowering interest rates you could trigger a recovery, you could bring down borrowing cost for consumers, you brought down borrowing cost for investors and that is what led to a recovery.
This time around I feel it is the same thing that is going to happen. We hear that monetary policy has peaked. It probably has, and if indeed rates start to decline over the next year, I think this time next year you will probably see both consumption and business investment recovering. So India is perhaps still insulated because it does not depend as much on exports for its own growth, but the fact that its domestic demand is still dependent on a little bit of fiscal stimulus and business confidence, that might make the recovery a little more challenging this time around.
How much worse do you believe the fiscal deficit can get against the projected 4.6% of GDP and again what is the sort of tax revenue growth that you are pencilling in?
The fiscal deficit is targeted at 4.6% and the consensus now is that target is not going to be met and we agree with consensus on that. Again the consensus view is that the actual deficit will be somewhere between 5% of GDP and 5.5% of GDP and we have no reasons to disagree dramatically with that assessment. So we do think the target will be missed and this means that borrowing cost will probably stay high for the government in the near term.
In terms of revenue growth, in India revenue growth is co-related with the way the nominal GDP grows and more importantly the way profits and wages grow because that is how your corporate income tax comes in and at the beginning of the year people had simply assumed a higher rate of GDP growth which assumed a higher rate of profitability that has not turned out to be true. So we do expect that the revenue targets as well will be missed.
Just a final question then do you see the downside risk to GDP forecast of around 7.5% for FY12 still now that the monetary tightening is widely expected to be at its peak?
There is always a downside risk to GDP growth when you see global growth being revised down again and again as we are seeing now and also the fact that we talked earlier about business confidence that business confidence has yet to recover. So given that yes there is some downside risk. We have already seen the high frequency data which is the PMI data that comes out, the IIP data that comes out. That shows that particularly manufacturing is feeling the brunt of this tightening monetary policy.
So yes, there is a mild downside risk. From a sovereign rating perspective, do we worry inordinately about it? No. I would say if growth is a tad lower than say 7% or 7.5%, I do not think that changes our view that in the long term. India actually has the growth potential and will continue to retain that growth potential, thanks to its demographics, thanks to the existence of an entrepreneurial spirit and thanks to savings rate that is able to fund that growth. So those three things have not really changed.
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