Talking to ET Now, William Foster, Moody's Investors Service, points out that the debt level that India currently holds is at about 68% of GDP relative to about 44% for that peer group.



Edited excerpts:



What is your view on the impact of GST and demonetisation on India’s growth because Q1 saw a slowdown and there are many concerns over growth being sub-7% for FY17?



My view on GST is that long term it is going to be a very positive thing most likely for growth as well as for government revenue generation. In near term, there will be some disruptions and I think that is probably what we are seeing right now because of the changeover in system, there is going to be disruptions in the supply chain, to a certain extent particularly in the informal economy.



GST, over time, is going to bring much of that informal activity into the formal economy system and that will take some time and it would be somewhat disruptive. In the near term, you got to see destocking in advance of GST. Ultimately, once these things get worked through over the next year or so we expect this to be stabilise effectively and ultimately GDP will start picking up and be more sustainable at higher level in the future.



What is also important at this point in time is to understand that there are concerns over some more pressure in terms of outlook for India. The additional borrowing programme is one of those concerns. Tax revenue collections as well as the divestment and lower dividend have been some more additional concerns and the fact that the economy now needs a stimulus for growth. Does it in anyway make you revisit your stance on India and its macro outlook?



From the current profile perspective, the biggest constraint holding back India’s credit profile and credit rating is its relatively low fiscal strength compared to the peer group. The debt level that India currently holds, is at about 68% of GDP relative to about 44% for that peer group.



So continued consolidation and commitments to bringing down deficits both at the general government level which include both federal and state governments over time to bring down that debt stock over time is important for the credit profile ultimately.



The question then is to what extent would any fiscal stimulus while increasing the deficit, will end up being positive in the medium term for that fiscal and for growth dynamic.



Ultimately, if there was fiscal stimulus that would bring out the deficit beyond the current deficit target, then it would have done in a way ultimately adding to the potential growth and capital stock for the future.



We will just have to wait and see if the government decides to do anything along those lines. They have been relatively consistent in saying that they intent to abide by the 3.2% deficit target this year and intent to maintain their ultimate fiscal consolidation agenda. That is very positive in terms of the outlook but if there was any bearing from that, it would very much need to be within that a medium term context of bringing the deficit back to downward path over time and targeting some of the other features in the system like the lack of infrastructure, areas such as the banking system which needs some capitalisation and support to address the weak investment cycle.



ET Now: What according to you would be the impact on India’s sovereign rating and the key opportunities as well as risks to the rating in the current macro context?



The opportunity from our perspective is we have India’s credit rating at Baa3 with a positive outlook meaning there is a chance that we could consider an upgrade in the future and the basis for that was really the fact that the reform agenda that the government has prioritised over the last few years is potentially supported if it moves forward, if it is implemented effectively and the objectives achieved would strengthen India’s credit profile particularly in the areas where it is weakest.



So revenue reforms like GST from our perspective would lead to revenues going up over time and effectively provide a stronger revenue base for future infrastructure spending, addressing the bottlenecks in the system and overall putting the government in a stronger fiscal position over time provided they continue to have a medium term commitment to fiscal consolidation.



Those are really the opportunities. Pushing through the reform agenda as it has been laid out, being patient ultimately and letting things like GST evolve which though disruptive in the short term, in the medium term should be very positive. Fundamentally, those are the opportunities. There is continuing the reform agenda, strengthening revenues and also if we see efficiency of expenditure in things like the DBT has been doing, and Aadhaar is very promising in terms of the ability to reduce leakage in the system.



From the current rating perspective, adjusting the fiscal which is the weakest aspect of the credit profile will be very positive. The risks are also fiscal in the sense that if the deficits continue to widen, if the states’ deficits continue to widen while the central government’s may stay the same or ultimately if there is more fiscal stimulus, then they start to veer away from that medium term fiscal consolidation agenda.



The government has asked PSUs to spend Rs 25000 crore. What is your view on PSU spending and its impact?



It really just depends on how that money is spent. If there are good projects that could benefit from increased spending that would contribute to the capital stock and infrastructure over time and the impact on the economy would be great. The flip side of that is that if the spending moves forward but it is not done efficiently. It would lead to declining profitability at these companies. Ultimately these are public sector companies that are contingent liability for the government and so if they are underperforming, if they are not profitable, then over time there is a chance that the government is going to have to step in and give those public sector entities more money which would be costly to the government and to the Indian sovereign over time which would be negative for the profile. It really depends how the money is spent.