Kristin Lindow is vice-president with international rating agency Moody's and the lead analyst responsible for India's sovereign ratings. In 1997, she gave P. Chidambaram's Dream Budget a thumbs down by giving India a negative rating. In an interview with Arindam Mukherjee, she airs her concerns on the future of economic reforms under the UPA government. Excerpts:
How is Moody's looking at the new Indian government?
We have been encouraged by some statements but we are also concerned about the spending mandate inspired by the CMP We are concerned that it might not be consistent with reducing the fiscal deficit in a way we anticipated previously. There may be a near-term future for the (Vijay) Kelkar proposals for the broadening of the tax base. But it's unclear if they'd be levied on rural men which would be against the whole premise of reforms with a human face.
In January, Moody's upgraded India's foreign currency rating to investment grade. Will that change now and what about India's domestic rating which has remained low?
We still believe the foreign currency rating is appropriately investment grade, admittedly low investment grade. Even if there were to be a slowdown or reversal of (foreign) capital flows, the liquidity situation is so strong it would increase payments. The negative outlook on the domestic currency is appropriate because we now see that the ambitions for closing the fiscal gap are less than they were previously and the fact that the revenue deficit would be eliminated in 2009 as opposed to the previous target of 2007 is not encouraging. I'd like to see some more teeth in the Fiscal Responsibility Bill or more specification as to how we go from the current situation to an eventual elimination of the revenue deficit. Of course, there is always going to be a concern about the credibility of the promises because people are still wondering whether or not the Left Front is sufficiently amenable to some of the changes that would be involved.
The Left parties have been advocating an increase in subsidies. What signal does this give foreign investors?
Subsidy reduction had been one of the more reasonable conclusions for the government previously, whether or not it would have been possible is unknown. But now that subsidy reduction seems to be off the table and it may actually increase, it is actually a big setback. From the standpoint of people heading economic policies, including the prime minister, it is somewhat surprising that such categorical statements are made on subsidies.
Both Manmohan Singh and P. Chidambaram have a reputation of being reformers. What signals do they send to the investor community abroad?
To have an economist as the prime minister is somewhat unusual and I think it shows that the government would be serious about managing economic policy in a serious and prudent way.
Do you think the government will have the freedom to undertake reforms in a desirable way?
There are other people in the Congress who'll be sniping at these leaders, specially Manmohan Singh. But I suspect they'll have freedom to work on economic policy. You have more of a problem coming from the Left. They'll want to get in the way. The issue is how willing they'll be to fight the ministers who decide to undertake reforms inconsistent with their ideology. It will be a game of brinksmanship. We'll get a lot of indication from this budget. And we'll get a lot of information from the next. Of course, no one wants to wait even till July, much worse next February.
The new government has ruled out disinvestment in oil companies and in other profit-making PSUs....
To privatise non-profitable companies is kind of unrealistic. There are lots of profitable and could-be profitable companies which need capital induction but the government does not have the resources. You know how many gyrations have happened on disinvestment over the years. This is one area where you often have reversals. And they keep saying India's reforms are irreversible.
The CMP promises to increase spendings on health and education with no proposals to raise revenues. Still, the government expects a 7-8 per cent gdp growth. Is this possible?
It would be absolutely inappropriate to increase spending that quickly. They also don't have the resources to expand education and health spending to these levels immediately. It is certainly appropriate in the long term for these areas to constitute larger shares of the budget. The problem is the government has huge debt and spends a third on interest. You have to look at the debt dynamics; that requires a discipline in a lot of areas. But we know where these people (the PM and the FM) stand on reforms, they understand what needs to be done. The problem is in getting it done. The political realities are a bit difficult in India. It's more difficult now.
So what is Moody's outlook for India?
If you go back to a more normal agricultural growth, all you can expect is 6.5 per cent this year despite the uncertainty. You have an underlying momentum, but not as rapid as India needs in terms of employment. India needs China rates of growth. As far as fiscal deficit is concerned, it's not as though you have a big fiscal deficit but in terms of government spending, it is big considering that it's not such a big government.