India facing risk of being in a larger structural slowdown: Gene Fang, Moody’s
India’s debt to GDP at 67% is significantly higher than other peers in the BAA rated space .
I want to understand from you the timing of the downgrading India to negative from stable, given the government’s recent measures to kickstart growth. What was the rationale for this move coming in at this time?
We have taken into consideration the measures that the government has taken to kickstart growth; we do expect those to have a positive effect with some lag and we do expect growth to tick up again next year to about 6.6%. In fact, we have factored that into our thinking.
At the same time, we do think that there is considerable risk that growth will nevertheless remain lower for a longer period of time and our rationale points to some more deeply embedded structural issues in the economy and also the emergence of the potential credit crunch coming out of the NBFI sector.
What would you say the government needs to do in order to mitigate or eliminate the risks that you just highlighted to push economic growth?
We are not really in a position to provide advice on policy and we are focussing more on the credit side. But one of the things that we have talked about in our press release is the financial stress in the agricultural sector and the weak outcomes in the labour market, which we think are factors driving weakness in consumption. It may be even more difficult to address in order to revive growth more strongly. Of course, these labour reforms have long been on the table but are obviously very difficult to tackle.
What are the metrics that you would be looking out to further downgrade the outlook? What are the parameters that would help you understand and pick up on the nuances whether there is an economic recovery coming in or whether things are worsening even further?
The risks that we see and the risks that underpin the negative outlook go towards the weaker-than-expected economic recovery and a lower-for-longer growth path in the economy that is going to feed into our view on the debt to GDP ratios that India has currently at 67% government debt to GDP.
We look for the trajectory of that debt to GDP to continue to stabilise and even decline to resolve the outlook with a stable view. Obviously, if we see that trajectory begin to increase, that debt to GDP will be on an upper trajectory, that is more consistent with a downgrade.
The report says the government will not be able to help the stunted economic growth. You are saying this is possibly temporary. We will see an uptick again next year. You have talked about how income growth has been dampened and how low job creation is a concern. What makes you feel we will see that uptick next year?
Well again, as I mentioned before, the government has already taken some measures to help stimulate the economy. They have addressed low farm incomes, they have tried to provide aid to certain sectors such as autos and NBFIs but that impact will take some time to flow through the economy. I do not think the negative outlook was really tied to our near-term economic forecasts.
The negative outlook indicates that we see risks in the more medium-term trajectory of growth for India and that we will see a trajectory that is considerably lower for a longer period of time.
There seems to be a bit of a vicious circle because if the government does something on the policy front to scale up the economy, that will definitely have a fiscal burden. What are your internal GDP as well as fisc targets that you have for both the financial year as well as near term?
Our near-term growth estimate is 6.6%. In terms of the fiscal, we do think that the government is likely to miss its own fiscal deficit for this year and there is a risk it will also happen in the year going forward. We do see probably a little bit more weakness on the fiscal side than what the government has in mind. Part of that is driven by the slow growth which can have a negative effect on fiscal outcomes.
We have some near-term targets in mind, but the outlook is pointing to a more medium to long term risk and if growth does not revive to a more robust level, the debt to GDP trajectory will be on a declining slope.
I want to get a sense of how serious this is a) compared to perhaps other emerging economies at this point of time and b) because of medium to long-term risks, are you saying there is a threat of this being a larger structural slowdown?
Yes, I think partly that is what we are pointing to the risk of this being a larger structural slowdown. In terms of comparables, India’s debt to GDP at 67% is significantly higher than other peers in sort of the BAA rated space. The peers in the BAA space have a median debt to GDP ratio of around 52%. That is why debt to GDP is one of the biggest challenges that India faces from credit perspective.
How closely will you be watching the Bbudget or are you anticipating anything else that the government may announce before that to help alleviate some of those concerns?
We always watch the Budget very closely, but I am not here to necessarily provide policy recommendations or indicate anything in particular that the government needs to do in response. We obviously watch the budget very, very closely. We will be seeing how the stimulus measures that the government has already taken, play through and those will be the factors that we want to keep an eye on.