'Policy action not enough to prevent downgrade'

Yesterday, Reserve Bank of India (RBI) Governor D Subbarao had said India should be prepared to see its sovereign rating downgraded to ‘junk’. Today’s data on fiscal deficit only buttress his point.

Till July this financial year, the government’s fiscal deficit crossed half the Budget target for the entire financial year.

Though growth in gross domestic product (GDP) for the quarter ended June stood at 5.5 per cent, exceeding expectations of sub-5.3 per cent growth, so far, action on the policy front hasn’t been enough to make rating agencies retain the country’s current grades, say economists.

In April, two international ratings agencies—Standard & Poor’s and Fitch—had cut India’s credit outlook from stable to negative, and put it on a ‘watch’ mode for 12-24 months. Analysts, however, say the agencies might not wait that long, especially as short-term debt is rising.

UNDER WATCH
Ratings agency	Sovereign ratings for India	Outlook for sovereign ratings	Month
Moody’s Investors Services	Baa3 (lowest investment grade)	Retained Stable	April 2012
Standard and Poor’s	BBB- long-term sovereign (lowest investment grade)	Downgraded to Negative from Stable	April 2012
Fitch Ratings	BBB- (lowest investment grade)	Downgraded to Negative from Stable	June 2012

The Budget estimate of reining in fiscal deficit at 5.1 per cent of GDP is based on assumptions such as limiting subsidies to less than two per cent of GDP, meeting the Rs 30,000-crore disinvestment target and reforms in the administered pricing of oil. “Most of these steps do not seem to happening right now, and crude oil prices are on a significant rise, from $95 to $114 per barrel…rating agencies are watching this,” said an analyst of a rating agency, on condition of anonymity.

Tirthankar Patnaik, director (institutional research), Religare Capital Markets, said weak growth was likely to remain an overhang on the corporate sector. In the near term, this raised chances of a sovereign downgrade, particularly in the light of the policy front stalemate, he added.

Madan Sabnavis, chief economist, CARE Ratings, said despite the 5.5 per cent GDP growth, he would not be surprised if India was downgraded, as even the biggest of economies were staring at downgrades. “Moreover, these ratings agencies work independent of the country’s numbers, with estimates of their own,” he added. However, he said, “FIIs (foreign institutional investors and FDI (foreign direct investment) have been doing well.”

Earlier, Art Woo, Asia sovereign director, Fitch Ratings, had told Business Standard there was a “more-than-likely chance” India would be downgraded to ‘BB+’ (a junk grade), from ‘BBB-’ (the lowest investment grade rating) in 12-24 months.

“When we say a more-than-likely chance, this essentially translates into over 50 per cent chance,” he had said.