S & P Outlook Downgrade Sword Hangs Over India

Standard & Poor's (S&P) may downgrade the outlook on India's sovereign rating from 'stable' to 'negative', if the current economic slowdown shows no signs of improvement.

According to S&P, the economic slowdown would lead to a reduction in tax revenues for the government and, therefore, put pressure on the fiscal deficit.

India's current rating for the foreign currency is BB with a stable outlook, while its local currency obligations are rated as triple-B (BBB) with a stable outlook.

S&P had last revised India's rating in October 2000, when it cut the outlook from positive to stable, citing the government's inability to accelerate the pace of economic reforms.

 

Surinder Kathpalia, managing director, South and South East Asia, S&P credit market services, told Business Standard: "The last budget has made promising plans, but the government has been unable to introduce (the necessary) legislation. The steps, if initiated, would have boosted GDP growth, leading to an increase in tax revenues for the government."

According to S&P, the total fiscal deficit of the Central and state governments is currently at 10 per cent of the GDP.

This is hampering the scope for improvement in the sovereign rating as it is one of the highest among the emerging market economies.

"While India enjoys a comfortable position in external liquidity, the main problems facing India continue to be domestically created," he added.

Most of the public spending is going into infrastructure projects which have got clogged at the same time as economic growth has slowed down.

This is affecting the tax revenues of the government which, in turn, is affecting the fiscal deficit.