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Govt asks S&P to clarify rating action

Sidhartha  |  Mumbai 

To also hold consultations with Moody's and Fitch.

A team from rating agency Standard and Poor’s (S&P) is expected to hold discussions with finance ministry officials after the government asked for an explanation for lowering India’s long-term sovereign rating outlook from “stable” to “negative”.

The government is also approaching the other two major rating agencies — Moody’s and Fitch — to explain its fiscal strategy, the economic situation and the outlook.

On February 24, S&P cited the deteriorating fiscal situation as a key reason for lowering the outlook. Though the agency left the actual rating unchanged at BBB-, lowering the outlook raises the prospects of a downgrade to sub-investment grade, which would make it more expensive for Indian companies to raise money overseas.

  S&P Moody’s Fitch
Long-term foreign currency BBB- Baa3 BBB-
Long-term local currency BBB- Ba2 BBB-
Foreign currency Negative Stable Stable
Local Negative Stable Stable

The revision in the long-term outlook prompted many foreign institutional investors to sell in the Indian markets, as a result of which the rupee hit an all-time low of 52.18 against the dollar on March 2.

Senior officials involved in the exercise said the finance ministry has written to the rating agency, pointing out that India remained among the world’s fastest-growing economies and had never reneged on its commitments.

The ministry also pointed out that the rise in the fiscal deficit was on account of the global slowdown and that other countries have taken similar steps to boost economic activity.

“It is not a reasonable and fair assessment by S&P. We want to understand its methodology and how it has dealt with similar issues in other countries since it appears to have been more prompt in dealing with us than the others,” said an official.

“If private investment has dried up, the government has to step in and take whatever action is required. In most cases, it will result in more spending by the government and deficit will go up temporarily,” his colleague added.

A senior finance ministry official also pointed out that the International Monetary Fund had expressed confidence in the Indian economy in its latest country assessment report. “No one seems to be as worried as S&P,” he said.

According to the finance ministry’s assessment, the Indian economy is expected to grow by 6.5 to 7 per cent during the current financial year and is likely to maintain the same growth rate in 2009-10.

“The situation is not as bad as it was three months ago. Real estate and segments that are heavily dependent on exports, such as gems and jewellery, will take a while to recover, given the structural issues and the demand overseas,” a secretary-level official said.

Meanwhile, representatives from Moody’s and Fitch told Business Standard that they would wait for the elections and the full budget to be presented by the next government to assess the long-term fiscal roadmap before taking further steps.

The agencies think some populist measures by the government in the last budget, such as the farm loan waiver, have been responsible for pushing up the Centre’s fiscal deficit to 6 per cent of Gross Domestic Product (GDP) against the budgeted 2.5 per cent.

They are also concerned about off-budget items such as subscriptions to oil bonds from public sector oil marketing companies to compensate them for subsidised fuel prices, and the states’ deficit, which would push the overall deficit to two-digit levels.

With the spurt in spending and lower tax collections on account of the slowdown, the government has had to defer its fiscal consolidation plan that was part of the Fiscal Responsibility & Budget Management Act. In 2009-10, the fiscal deficit is budgeted at 5.5 per cent of

Also read: February 25: S & P cuts India outlook to negative 

First Published: Mon, March 30 2009. 00:14 IST