S&P maintains negative outlook on India rating

Written by fe Bureau | New Delhi | Updated: May 18 2013, 08:18am hrs
Standard and Poor's on Friday reiterated its negative outlook on India's credit rating, citing the country's large fiscal deficit and national debt, even as it acknowledged that the country's position had improved over the past year.

The global rating agency said that Asia's third-largest economy still has at least a one-in-three chance of having its ratings downgraded in the next 12 months -- a statement that New Delhi found disappointing, although not surprising.

S&P affirmed its 'BBB-' long-term (the lowest investment grade or a notch above junk status) sovereign credit ratings for India, and said that while steps had been taken to rein in the current account deficit, infrastructure bottlenecks and a rigid regulatory structure remained a concern.

This amounted to a digression from the agency's January stance when it said the possibility of India losing its investment-grade credit rating had receded somewhat as a result of economic reforms undertaken by the government.

Economic affairs secretary Arvind Mayaram said:We had thought that they (S&P) would review their rating, but it was not surprising. They said that the government has regained control over fiscal space, which means they acknowledge the finance minister's fiscal consolidation target as credible. It indicates that even though fiscal deficit is high, we are in the right direction.

Chief economic advisor Raghuram Rajan barely hid his disappointment when he said international institutional investors, who have invested over $17 billion into India so far this year, seemed to have a different view.

The government will continue to do what is necessary to keep India on a stable, sustainable and strengthening growth path, " Rajan said.

"High fiscal deficits and a heavy government debt burden remain the most significant constraints on our sovereign ratings on India. Nevertheless, the government has regained control of public finances and embarked on fresh structural reforms since September 2012," S&P's credit analyst Takahira Ogawa said.

"We may revise the outlook to stable if the government carries through with its plans to unleash public and private investments (for example, by enacting the land acquisition Bill), to implement a nationwide government sales tax (goods and service tax), or to further trim fuel and fertiliser subsidies," S&P said.

It added: We may lower the rating if we conclude that slower government reforms than we currently expect would not lead economic growth to recover to levels experienced earlier this decade. Such a conclusion could come from anemic investment growth, reversals on diesel or other subsidy measures, or inability to increase electricity supply to meet increasing demand.

S&P and Fitch had cut their outlook on India to negative last year, warning the country of a possible rating downgrade to "junk" on worsening public finances, a slowing economy and persistent political stalemate over major reform measures.