After an upgrade by Moody’s Investors Services, India on Tuesday sought higher ratings by Standard & Poor’s (S&P), even as the rating agency asked the finance ministry about the rationale behind its optimism that economic growth would rise to 7.6 per cent this financial year, against 6.9 in 2011-12. It also asked the ministry about its plans to rein fiscal deficit.
S&P asked the ministry officials why they were hopeful of cutting the fiscal deficit to 5.1 per cent of the gross domestic product (GDP) in 2012-13, when it was estimated to be rising to 5.9 per cent in 2011-12, against the budgetary estimate of 4.6 per cent.
Ministry officials based their argument for better grading on the premise of good economic growth prospects, higher revenue generation and efforts to contain fiscal deficit. "The meeting ended on a positive note. The finance ministry officials claimed India was faring much better than the countries with a ‘BBB’ ranking," said those privy to the development. The meeting was chaired by economic affairs secretary R Gopalan.
S&P has assigned India a sovereign rating of ‘BBB- with a stable outlook’, the lowest investment grade rating. It indicates the country has adequate capacity to repay debts, but adverse economic conditions could have implications on its ability to meet financial commitments.
During the meeting, S&P representatives expressed concern over the high fiscal deficit, the rising subsidies and raised questions on India’s prospects of economic growth. They also sought to know more on the interest rate scenario in the country.
The ministry officials are understood to have highlighted India’s growth story and the Budget proposals to raise revenues and cut deficit.
Budget 2012-13 had brought out a road map for cutting fiscal deficit to 1.9 per cent of GDP in 2012-13. It also envisages that the subsidy would be brought down to 1.6 per cent by 2014-15.
However, with reforms in the oil sector yet to be carried out, many have cast doubts over the optimism of reining in subsidy and hence, the larger fiscal deficit.
There is also a fear among many that S&P may cut India’s rating.
Madan Sabnavis, chief economist, CARE Ratings, however, said, "S&P would possibly retain the present level of ratings, as intrinsically, we are a very strong economy compared to European nations." There was no convincing case for a downgrade, he said. "However, in financial year 2011-12, the economic performance was sub-optimal and Budget 2012-13 may not be fully convincing on certain assumptions such as subsidies or the fiscal deficit," he added.
After a similar meeting with finance ministry officials in November 2011, Moody’s Investors Service had upgraded the rating on long-term government bonds denominated in rupees and the long-term country ceiling on foreign currency bank deposits, both from Ba1 to Baa3 - speculative to investment grade.