CEA slams rating agencies; admits GDP growth will decline

Chief Economic Advisor Krishnamurthy Subramanian said India's economy will witness a decline in the current fiscal, but the drop will be limited if there is an economic recovery in the October-March period.

The government on Thursday virtually rejected rating actions by international agencies, saying India's fundamentals demand a much better sovereign rating and the country's willingness and ability to repay debt is gold standard.

In first official comments since Moody's Investors Service downgraded the country's rating and S&P retained it at the lowest investment grade, Chief Economic Advisor Krishnamurthy Subramanian said India's economy will witness a decline in the current fiscal, but the drop will be limited if there is an economic recovery in the October-March period.

Speaking to reporters, he said the finance ministry had in April, which was just weeks into lockdown, had estimated GDP growth at 1.5-2 per cent in the current fiscal on anticipation of a V-shaped recovery.

"The V-shaped recovery is driven by evidence of what was seen in the Spanish Flu... The anticipation of recovery ... what is uncertain though whether the recovery will happen in the second half of the year or will it happen next year and therefore the actual growth will depend critically on when the recovery happens.

"If recovery does not happen this year, the economy will basically have a decline in output this year and suppose in the second half there is a recovery, that may be limited," Subramanian said.

A V-shaped recovery is a type of economic recession and recovery that resembles a "V" shape in charting. A V-shaped recovery involves a sharp rise back to a previous peak after a sharp decline in these metrics.

He took comfort in rating agencies acknowledging reforms saying these are critical elements for higher growth next year.

The ministry, he said, is working on a large range of growth estimates for this year, and recovery in the second half or next year is also part of baseline expectation.

The Indian economy grew at the slowest pace in 11 years at 4.2 per cent in 2019-20.

S&P Global Ratings and Fitch Ratings has forecast India's economy to shrink by 5 per cent in the current fiscal, while Moody's has projected growth to contract by 4 per cent.

S&P, however, has projected GDP growth to bounce back to 8.5 per cent, Fitch expects it at 9.5 per cent in 2021-22.

Moody's has forecast growth at 8.7 per cent next year.

Moody's, earlier this month, while downgrading India's rating to lowest investment grade, had said India faces a prolonged period of slower growth and policymakers will be challenged to mitigate risks of low growth, deteriorating fiscal position and financial sector stress.

S&P, on Wednesday, retained India's sovereign rating at the lowest investment grade of 'BBB-' for the 13th year in a row, saying that the economy and fiscal position will stabilise and begin to recover from 2021 onwards.

Making a case for rating upgrade, Subramanian said, "When you take the willingness to repay, India is gold-standard and with regard to ability to repay, India is close to gold-standard... India's fundamentals demand a much better rating."

The finance ministry, he said, has evaluated the pros and cons of options such as deficit monetisation.

"We keep all options under consideration and will be evaluating them."

On privatisation policy, he said banking will form part of the strategic sector and the government is working on identifying strategic and non-strategic sectors.

"In non-strategic sectors, all public sector enterprises will be privatised. In strategic sectors, the number of state-owned enterprises will be limited to one to four.

“In most strategic sectors, there is competition from the private sector, where there isn't, that will be enabled.

“And banking is a strategic sector, so banking will be part of the strategic sector...the work is going on," Subramanian said.

Photograph: Anushree Mascarenhas/Reuters