Fiscal deficit prompts S&P downgrade

Written by Markets Bureau | Mumbai | Updated: Feb 25 2009, 05:41am hrs
Indias burgeoning fiscal deficit has earned a downgrade from international credit rating agency Standard & Poors. The agency has revised the outlook on long-term sovereign credit to negative from stable. The agency now rates India at the lowest BBB- investment grade and has raised concerns about sustainability. Indias short-term sovereign credit rating remains unchanged at A3. Moodys and Fitch, the other two major rating agencies, have also expressed concern about Indias fiscal deficit.

The downgrade is not expected to immediately impact the flow of foreign capital into Indian equity markets as the Centres high deficit has already been factored in, said Care Ratings executive director Rajesh Mokashi. But Indian companies could find it more expensive to tap debt and even equity from international markets, particularly as liquidity is scarce.

Indian companies have been accessing debt at Libor plus 450-500 from markets abroad. This spread could increase to about 700 and force the government to relax ECB rules. Lowering the countrys sovereign rating is likely to make resources more costly for Indian companies in the international markets, confirmed Fitch Ratings MD Amit Tandon.

The outlook revision reflects our view that Indias fiscal position has deteriorated to a level that is unsustainable in the medium term. We expect general government deficit, including off-Budget measures such as oil and fertiliser bonds, to increase to 11.4% in the fiscal year ending March 31, 2009, from 5.7% in the previous fiscal year, said S&P credit analyst Takahira Ogawa. The firm had upgraded Indias sovereign rating in January 2007.

Besides various policies that increase stress on its fiscal position ahead of the general election, including the debt relief for farmers and a pay hike for government employees, S&P said higher global oil prices in the first half of 2008 and the global economic slowdown increased the deficit size further. We expect the deficit to remain high at 11.1% in fiscal 2009-2010. The fiscal deficit could widen if the next government implements another stimulus package, said Ogawa.