James McCormack, managing director, Sovereign Ratings, Asia Pacific, Fitch Ratings, was in India for the agency’s annual review of India's sovereign ratings. He says the conditions are now worse than in July 2008, when Fitch downgraded the outlook on the rupee to negative from stable.
In an interview to Rajendra Palande, McCormack warns that the longer the global credit crisis drags, the greater the chance of India's GDP growth falling below 5.5 per cent next year. Excerpts:
It is stressful from ratings perspective. In July, we revised the outlook on India’s local currency rating to negative, based on possible reversal in fiscal correction. Since then, things have got worse, though not on the fiscal side. India has to now deal with difficult issues — growth outlook and external financial position. Some of the external pressures are evident. The deterioration is growing clearer. Corporate India is suffering from shortage of funds. External borrowings were the supporters of growth in the recent years. For this reason, we are increasingly concerned about the growth outlook.
India GDP to slow significantly?
Several private forecasters have lowered India's growth to below 6 per cent next year. Some have put it at 5.5 per cent. The longer the credit crisis extends, the greater the chance of a lower than 5.5 per cent growth next year. Funding (for projects) is simply not there. A 5.5-6.0 per cent growth would be much less satisfactory. A 9-10 per cent growth is required to generate the required number of jobs. Growth slowing to 4-5 per cent will mean rising unemployment. The economy has to grow or it would start to feel like a recession.
Foreign exchange reserves a buffer?
Is India running out of foreign currency? It is extremely difficult to think of such a scenario and is not conceivable in the immediate term. There is pressure on the rupee and on the balance sheets of companies. Companies cannot source international funding to continue to expand and grow. From the rating perspective, Fitch is still comfortable, reflecting some strength in the context of underlying external sector strength. The RBI is not defending a particular rate for the rupee. That’s a positive.
Is about $60 billion of foreign debt maturing by March 2009 a big concern?
Compared to India's forex reserves, it is not alarming. These are certainly sizeable outflows. Equity investors too are leaving. Unless global market turns around, there would continued outflows and pressure on rupee. Companies cannot get credit, nor can rollover credit. India is still okay relative to some other nations. The country's overall external debt burden is quite modest.