Budget 2024: 'Travesty' if rating agencies don't reckon our transparent fiscal path, former CEA

A face-off has ensued between India's former Chief Economic Advisor (CEA) KV Subramanian and Moody's Investors Service on a topic that has been a bone of contention between the world's fifth-largest economy and the credit rating agencies for a while now: sovereign credit rating.

Subramanian said it would be a travesty if rating agencies don't acknowledge India's transparent fiscal consolidation path.

"If indeed a 5.1% fiscal deficit is achieved in the coming year, that means the path toward a 4.5% fiscal deficit will be something that will be very credible. I hope the rating agencies are looking at this because given the kind of transparent fiscal consolidation path that India has achieved, I think it would be an absolute travesty if the rating agencies do not account for this. I must highlight that, as the fifth largest economy in the world, we have never ever been rated BBB," Subramanian told CNBC-TV18 on Thursday while discussing Finance Minister Nirmala Sitharaman's interim budget.

Subramanian stated that India has never defaulted and that "our willingness to repay debt is the gold standard."

Global rating agency Moody's Investors Service's Christian de Guzman, however, responded by saying that "a lack of a default history is not a marker of a high credit rating."

Making a strong case for India's rating revision, Subramanian further said, "Rating is actually a reflection of the ability to repay and willingness to repay. India has never defaulted. So the willingness to repay is the gold standard and all our debt is domestic. So I don't know what model the rating agencies use. As a financial economist, I can say with absolute conviction that it is flawed."

While acknowledging that India's interim budget has indicated a continued narrowing of the fiscal deficit after the COVID-19 pandemic, Moody's Guzman added that it is important to note that India's fiscal deficit was below 5% before the COVID-19 pandemic.

"I think let's not lose sight of where we started. Prior to the pandemic, the union budget deficits were actually well under 5%. So in the five years prior to the pandemic, that average was actually 3.8%. So we're looking at perhaps, on a forward-looking basis, approaching 5%; we're still above where we were when we had India at BAA2," Guzman told CNBC-TV18.

Moody's last August affirmed a 'Baa3' rating on India with a stable outlook. A higher rating implies lower economic risk, allowing a country to borrow at cheaper rates.

He further added, "A couple of other things: when we look at our fiscal assessment, the stock of debt is also much higher than what we had seen when India was at BAA2. The more important thing for us is that affordability and interest payments to revenue here again is in a much weaker state than it was before the pandemic.”

Finance Minister Nirmala Sitharaman, in her interim budget today, estimated the fiscal deficit in the next financial year at 5.1% of GDP, lower than 5.8% in the current fiscal year.

"We continue on the path of fiscal consolidation, as announced in my Budget speech for 2021–22, to reduce the fiscal deficit below 4.5% by 2025–26," Sitharaman said.