S&P on Thursday affirmed BBB- long-term and A-3 short-term unsolicited sovereign credit ratings on India. BBB- is the lowest among S&Ps five investment grade ratings starting with AAA. A downgrade could lower Indias ratings into speculative grade, which implies the issuer presently has the ability to repay but faces significant uncertainties that could affect credit risk.
Indian authorities have been nearly dismissive of credit rating agencies, especially S&P, as they believed these agencies were crystal-gazing and overstating countrys deficit worries and growth slowdown. When S&P said in September that the chances of India getting downgraded over the next two-three years were one-in-three, economic affairs secretary Arvind Mayaram had cited the IMFs lowering of the global growth estimate, Indias recent policy push to large infrastructure projects, a bumper harvest that would spur agriculture GDP, etc, to counter the downgrade threat.
When the agency affirmed its negative outlook on Indias rating in May this year, finance minister P Chidambaram had said his ministrys case (to S&P) was that the country deserved an upgrade both on the outlook and the rating. The minister had then promised to take measures to improve key indicators, particularly to lower the current account deficit (CAD) by curbing gold imports, and this has since yielded results.
Fitch Ratings maintains a BBB- sovereign rating and a stable outlook for India, while Moodys has assigned a stable outlook and a Baa3 rating.
The CAD, that was originally projected to be at $70 billion for this fiscal, is now re-estimated to be less than $60 billion by the finance ministry. Prime Ministers Economic Advisory Councils chairman C Rangarajan, who initially projected CAD for the year at $70 billion or 3.8% of GDP, has also recently said a substantial reduction in CAD seems possible and that it could be in the range of $60 billion.
In line with this, S&P considers CAD to narrow slightly to about 3.7% of GDP by March 2014, mainly because of restrictions on the import of gold and weaker domestic demand.
S&P wants the next government to give a credible plan to reverse the low economic growth that was at 4.4% in the April-June period, its slowest expansion in four years. S&P said Indias external debt was low, forex reserves ample and monetary policy increasingly credible. Barring an unexpected deterioration of the fiscal or external accounts before the elections, we expect to review the rating on India after the next general elections when the new government has announced its policy agenda, it said.
The outlook would be revised to stable if it believes the agenda can restore some of the lost growth potential, consolidate fiscal accounts, and permit the conduct of an effective monetary policy.
Containing fisal deficit at the targeted 4.8% of GDP in fiscal 2014 will depend on the amount spent in an election year and trends in commodity prices, it said. The agency said depreciation of the rupee will delay phasing out of diesel subsidy as the gradual increase in domestic market price to import price would take longer to complete.
It also considers that Indias food security programme of covering two thirds of its entire households would double food subsidy to about 1.5% of GDP in future budgets. The governments estimate is, however, much lower than this. For the current fiscal, India has allocated R90,000 crore for food subsidy, which includes R10,000 crore due to the food security law. As per estimates, when the food security scheme is fully rolled out, it could cost the exchequer only R1.3 lakh crore a year. Some economists associated with the government, however, put the figure in the range of R2.7-3 lakh crore.