Reforms may save India from sovereign downgrade

Rating agencies welcome the recent reforms initiated by government

The recent reforms announced by the government are perceived as steps in the right direction by rating agencies, and it might save India from a sovereign downgrade.

Rating agency Standard & Poor's (S&P), which in June had threatened to downgrade India's sovereign ratings, on Monday welcomed big-ticket reform measures by the government, saying the steps would serve as a medium-to-long term positive for the macroeconomic conditions.

Similarly, rating agency Moody’s said on Monday the Indian government’s decisions like raising diesel prices, sale of part-stake in public sector companies and liberalisation of foreign direct investment in the retail sector would have minimal effect on the country's credit profile. Fitch Ratings said the reforms announced last week at first glance appear credit-positive.

"If the measures proposed by the government are implemented, we would expect a medium-to-long-term positive impact on the macro-economy," S&P director for sovereign ratings Takahira Ogawa, said in a note. The agency, however, maintained that its recent views on the country's economy remain. In April, the ratings agency had downgraded the country's outlook to negative. In June, it had said, "Slowing GDP growth and political roadblocks to economic policy making could put India at risk of losing its investment grade rating".

In a string of bold initiatives, the United Progressive Alliance government-II (UPA II), accused of a "policy paralysis", first announced Rs 5 per litre increase in the regulated diesel prices and a cap on subsided cooking gas usage. It followed up these measures with liberalisation of foreign holding caps in aviation, multi-brand retail, non-news broadcast media and power exchanges. It also announced a plan to divest its stake in five companies.

According to Moody's, the announcements will boost investor sentiment, which has sagged in recent months partly owing to the perception that the government would be unable to implement politically difficult structural reforms to revive growth. These steps seek to address specific market concerns about the government’s fiscal position and the deceleration of the country’s investment rate.

Ogawa raised questions over the efficacy of these measures. "We believe the government's recent announcement on foreign direct investments is an encouraging development, but at this stage it is still uncertain whether these measures can be implemented or nor," he said. He specifically pointed out to the liberty given to a particular state whether it wishes to adopt the changes in multi-brand retail FDI or not.

HOW THEY RATE INDIA
Ratings agency	Sovereign ratings  for India	Outlook for  sovereign ratings	Month
Moody’s Investors Services	Baa3 (lowest   investment grade)	Retained ‘Stable’	Apr2012
Standard and Poor’s	BBB- long term sovereign (lowest investment grade)	Downgraded to ‘Negative’ from  ‘Stable’	Apr2012
Fitch Ratings	BBB- (lowest	Downgraded to ‘Negative’ from ‘Stable’	Jun2012
Source:Rating agencies

"Hence, the actual impact from this measure might be less than expected," he said on FDI in multi-brand retail. Similarly, the proposed divestment of PSUs, he said, "depends on the actual implementation of the plan".

Fitch is also of the view there is still considerable execution risk given the Congress-led coalition’s divisions and recent track record of policy reversals. Broader concerns regarding the weak and inconsistent regulatory framework remain, said Fitch.