Excise and service tax cuts may make consumers and companies happy, but earlier giveaways and spending schemes to stoke economic growth this year have contributed to a deteriorating fiscal situation that has prompted Standard & Poor’s to revise its outlook on India’s long-term sovereign credit rating to negative from stable.
Revising the outlook signifies that the actual rating could be downgraded if the situation worsens in the coming months. A downgrade would put India in the below-investment category, meaning Indian companies will find it more expensive to borrow money overseas.
“With high government debt burden and deficits, its weak fiscal profile has been the single largest negative factor for the sovereign ratings on India,” S&P said in a statement.
“The outlook revision comes after a gap of two years and could result in lower inflows from foreign institutional investors and lead to some weakness in the rupee,” said Citi India economist Rohini Malkani.
| MAKING THE GRADE India’s sovereign ratings so far | |||
| S&P | Moody’s | Fitch | |
| Long-term foreign currency | BBB- | Baa3 | BBB- |
| Long-term local currency | BBB- | Ba2 | BBB- |
| Sovereign outlook | |||
| Foreign currency | Negative | Stable | Stable |
| Local | Negative | Stable | Stable |
The rupee slid 0.4 per cent to 49.8675 per dollar, according to Bloomberg data, partly due to the revision in the sovereign outlook and also because the dollar strengthened against most Asian currencies.
Government bond yields also rose to their highest level in over two months. The yield on the 8.24 per cent April 2018 paper went up 17 basis points to 6.59 per cent.
Companies, however, said that they would not be immediately affected since only the outlook had been changed, while the ratings had been reaffirmed at BBB- (long-term) and A-3 (short-term).
“There are problems everywhere in the world. In India, the fiscal deficit is widening and the government needs to look into it critically. It is still a change in outlook and not in the rating. The general expectation is that the Indian economy will recover much earlier than the rest of the world, said Grasim Industries CFO DD Rathi.
The treasury head of a large public sector bank said the outlook change would have little impact since the government did not borrow abroad and foreign lenders have turned credit-averse so that Indian companies have scarcely tapped overseas markets.
“Resources are normally raised through bilateral arrangements...Moreover, the views and the ratings by agencies are suspect,” said a senior SBI executive.
S&P also revised the outlook on the long-term issuer credit ratings of Indian Oil, NTPC, NHPC, Export-Import Bank of India, Power Finance Corporation, Indian Railway Finance Corporation and India Infrastructure Finance Company to negative from stable. Besides, 12 banks, including State Bank of India, ICICI Bank, HDFC Bank, and Axis Bank, saw a similar revision in outlook.
“There may be a marginal impact on the borrowing cost but who is lending overseas at the moment?” said the CEO of one of the companies.
While expressing concern over India’s fiscal position, the other two global rating agencies — Moody’s and Fitch — said they would wait for the new government to announce its medium-term fiscal outlook before taking a call on India’s rating.
On its part, S&P described the the fiscal position as “a level that is unsustainable in the medium term”. It estimated that the deficit, including off-budget items such as oil and fertiliser bonds that the government buys to keep retail prices artificially low, would touch 11.4 per cent during the current financial year, against 5.7 per cent in 2007-08.
For the next financial year, S&P estimated the deficit would stay at 11.1 per cent and said it could widen if the new government, which is likely to be in place by May, announced another stimulus package.
