S&P still negative on India, warns of rating downgrade

Govt says agency has not taken into account reforms initiated in last six months

Standard & Poor’s on Friday dashed India’s hopes of a rating upgrade. The agency not only retained the lowest investment grade on the economy but also warned of downgrading it to junk in a year if reforms were not expedited to reverse the slide in economic growth.

An upgrade in outlook on these ratings, to stable from negative, was possible if the government improved investment climate, Standard & Poor’s (S&P) said. However, there was no assurance of an upgrade in the foreseeable future.

S&P had assigned India BBB- long-term and A-3 short-term sovereign ratings, a notch above junk grade. Fitch Ratings and Moody’s Investors Service also had assigned lowest investment grade to India. S&P and Fitch had cut the outlook on ratings to negative from stable  in April last year, due to worsening public finances, a slowing economy and persistent political gridlock. Moody’s had retained it at stable. (SCORE SHEET)

The negative outlook, S&P said in a statement on Friday, signalled at least a one-in-three likelihood of a downgrade within 12 months. “We may lower the rating if we conclude that slower government reforms than we currently expect would not lead the economic growth to recover to levels experienced earlier this decade,” the agency said. Such a conclusion could come from anaemic investment growth, reversals on diesel or other subsidy measures, or inability to increase electricity supply to meet increasing demand. “Similarly, if India’s general government fiscal or current account deficits worsen contrary to our expectations, we may lower the ratings.”

If India’s ratings are indeed lowered to junk, the move could curtail foreign investment flow into the country, essential for financing the ballooning current account deficit (CAD). Also, the cost of raising funds abroad could go up for Indian companies.

India’s economy had grown at an annual rate of about nine per cent in each of the three years preceding the global financial crisis of 2008-09, when it fell to 6.7 per cent. In 2012-13, India’s growth could have plunged even lower, to an estimated decadal-low of five per cent.

S&P credit analyst Takahira Ogawa said though India’s external position remained resilient despite a deterioration in the past two years, the current account deficit widened significantly to 4.2 per cent of GDP during 2011-12 and was expected to widen to 4.5 per cent during 2012-13. This, Ogawa said, was the highest level in more than a decade. He said the government’s high fiscal deficit and a heavy debt burden remained the biggest constraints on India’s sovereign ratings.

S&P’s on Friday’s move could stick out like a sore thumb for the United Progressive Alliance government, which is likely to highlight its achievements as it completes four years in its second term next week.

S&P’s announcement came even as Finance Minister P Chidambaram tried to lure investments from London. He is to also visit Paris and Doha, too.

In Delhi, Prime Minister’s Economic Advisory Council Chairman C Rangarajan said S&P failed to take note of reforms initiated in six months. Reforms will be accelerated and there will be a case to upgrade the ratings, Rangarajan told Business Standard.

Economic Affairs Secretary Arvind Mayaram said S&P has acknowledged the government had regained fiscal space and there were no big concerns.

The government’s benchmark bond’s 10-year yield rose four basis points to 7.41 per cent before S&P issued the statement. The yield closed at 7.39 per cent yesterday.

The rating agency said it might revise the outlook to stable if it found that the government carries through its plans, such as enacting the land acquisition Bill, implementing a nationwide government sales tax (the Goods and Services Tax), or further trim fuel and fertiliser subsidies to unleash public and private investments.

Citing reforms it had initiated, the government had last month strongly pitched for an upgrade in rating by S&P when the finance ministry met the rating agency’s representatives.

S&P, however, said despite the initiatives from the Cabinet Committee on Investment to cut red tape on infrastructure and power projects, that committee’s success in raising investment growth remained uncertain.