Duff & Phelps Downgrades India Rating
International credit rating agency Duff & Phelps Credit Rating Company has downgraded India's foreign currency rating from BBB- to BB+ and the local currency rating from BBB+ to BBB. The outlook on the ratings, however, is stable.
"DCR has downgraded the ratings in the light of significant fiscal slippage and the potential balance of payment deterioration in the coming years," said a DCR release.
Recently, Standard and Poor's had put the BB+ rating on India on a negative outlook and placed it under review. Moody's had also downgraded the sovereign rating to BB (Ba2) with a stable outlook. All three ratings are below investment grade.
The GDP deficit of 6.1 per cent against a target of 4.5 per cent for 1997-98 and a target of 5.6 per cent for the year 1998-99 has been inconsistent with the rating agency's previous expectation of the economy's narrowing fiscal imbalances, the release added.
"Persistent high fiscal deficit would postpone reduction in central government debt and the high interest burden. High government borrowing will in turn put a pressure on interest rates and crowd out private investment," it said.
The pace of economic growth under a system coalition governments, the slowdown in the growth of exports and the impact of sanctions by the US government on India's balance of payments have been cited as the other major reasons for the downgrade.
"Differing priorities within the present coalition could constrain the government's ability to undertake critical reforms in the area of fiscal consolidation, privatisation, infrastructure development and export promotion," the release said.
Besides, the agency is of the view that measures like an import levy of four per cent, aimed at giving a shot in the arm to the domestic industry, reflects on the new government's protectionist approach towards economic policy.
A slowdown in exports and uncertain prospects of recovery has also been stated as a major area of concern. While the sharp depreciation in the Asian currencies has adversely affected India's export competitiveness, persistent infrastructure bottlenecks is expected to constrain growth in the medium term, the release said. "A slow recovery in exports would put pressure on balance of payments and prevent a faster reduction in the external debt burden, providing little stimulus to growth," it said.
On the impact of sanctions, it has said that it could result in lower capital inflows in the coming years. However, DCR did not expect any significant negative balance of payments developments before next year and would monitor the evolving sanctions situation closely, it added.
On the positive side, India's rating was supported by a strong liquidity position, a favourable external debt structure, structural reforms since 1991 and a mature democratic system, it said.