What are the likely effects of the election results on your agency's ratings of India's credit-worthiness?
We've had a BB+ rating for India for quite a few years now, mainly because India needs to achieve several things to make it more stable and credit-worthy. A lot has been achieved, but we feel very strongly that the fiscal deficit of the Union Government is quite large. If this is not corrected immediately, it could lead to a lower GDP growth rate, potential balance of payments problems all over again, and a whole host of other risks. But I truly don't think the elections are going to make much of a difference. Because the Indian authorities, the RBI and even politicians realise that this (fiscal deficit) is a problem.
However, having said that, we believe that the type of fiscal consolidation and reforms that we would consider necessary to bring the deficit down could generate quite a bit of controversy and be politically rather difficult to implement. Because of that, I think the likelihood of them taking place under a strong government is much higher than under a weak government.
What would be the effect of your ratings if, say, a Congress-led coalition—and you, like most people, pro-gnose a coalition—came to power?
What we're looking for is a sustained, long-term commitment to the process of reforms and there are reasons to believe that any future Indian government will move in that direction. While we do pay attention to election manifestos, another very important indicator of what governments of various political stripes might do is the state governments they control. Things have been happening even in some states not considered particularly market-friendly such as West Bengal, Orissa or Kerala. So the political composition of the next government is more a question of nuance and how quickly it is going to be able to get to work. We are only concerned that a weak government will make very little progress on macro-adjustment issues.
What, in your view, would be a weak government?
Maybe the safest and most informative kind of answer to that would be to ask you to look back at the kind of coalition governments India has had in the past. You had the V.P. Singh government, the Chandra Shekhar government. The next stage of reforms is going to involve tasks like reducing government expenditure on public sector enterprises, rationalising the whole state enterprise sector, improving the framework for private investment and bringing in foreign investment in a lot of infrastructure-related sectors. Anywhere in the world, such moves need a determined government—preferably one with a nice, supportive majority in the legislature. But we don't expect any reversal.
A reversal in what? In Indian policy or in your ratings?
Both. We don't expect a reversal in liberalisation. Though there could be some slippage on some macroeconomic controls.
What about India's ability to attract foreign investment?
Though you got a fair amount of investment over the last couple of years, the bulk of it came from the FIIs and into the stock-market. That does provide funds. However, in the long term, it would be more positive if you got the kind of investment that China's getting. People (in China) are building factories, roads, etc. This brings technology and skills and, from a balance-of-payment perspective, the money tends to stay in the country. It is not going to leave at the slightest sign of trouble. Portfolio investment, on the other hand, tends to be a lot more volatile.
But even in the case of China, US investment is currently undergoing reexamination in the light of political issues like the human rights question. So, let's say, should a BJP-led coalition come to power and political winds of change unrelated to economic issues sweep India, would they affect US investment and your ratings?
It really depends on what other things happen at the same time. One of the reasons why I earlier cited long-term direct investments is that India hasn't got very much and, as a result of that, we remain a bit guarded about the long term prospects of the balance of payments.
What are the aspects which would bring about a change in ratings?
Movement in the fiscal deficit. Improvements in the degree of foreign direct investment. If there is going to be a worsening of fiscal policy—which we do not expect—we would certainly have to review our assumptions, because we base our ratings on the gradual improvement of the fiscal deficit—not dramatic, but gradual.