New Delhi/Mumbai, April 25: In a firm warning that all is not well with the Indian economy, the country’s outlook was lowered Wednesday to negative from stable by Standard and Poors’ with the caveat that its credit rating may also be downgraded.
But the government said there was no need to panic.
As of now, the global ratings agency has kept India’s long-term rating unchanged at BBB minus — its lowest investment-grade rating. Any downgrade will not only add to borrowing costs and assign a ‘junk’ status to India’s government bonds but also turn investors cautious.
‘The outlook revision reflects our view of at least one-in-three likelihood of downgrade if external position continues to deteriorate, growth prospects diminish, or progress on reforms remains slow in a weakened political setting,’ S&P analyst Takahira Ogawa said.
In a separate action, the agency also lowered its outlook to negative for four state-run finance companies — Exim Bank of India, India Infrastructure Finance Co, Indian Railway Finance Corp and Power Finance Corp. They, too, stare at a hike in borrowing costs.
The announcements drew immediate reaction from Finance Minister Pranab Mukherjee.
‘I am concerned, but I don’t feel panicky because I am confident that our economy will grow by around 7 percent, if not plus. We will be able to control fiscal deficit and it will be around 5.1 percent,’ Mukherjee told reporters in New Delhi.
The remark came against the backdrop of the S&P analyst assessing India’s gross domestic product (GDP) growth at growth at 7 percent this fiscal, and the per capital income to to 5.3 percent against an average of around 6 percent in the past five years.
But what comes as a matter of even more concern is Ogawa’s assessment over a conference call that India’s fiscal deficit could widen to around 8 percent in the current fiscal year, against the government’s budgeted target of 5.1 percent.
‘A downgrade is likely if the country’s economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow,’ Ogawa warned.
But the finance minister sought to play down the warning, saying the government was not only hopeful of meeting growth and fiscal deficit targets, but will also pursue reforms even while admitting there were delays due to a number of factors.
Technically, India has been assigned a ‘A-3′ short-term sovereign credit ratings. The rating agency had, in fact, warned in February — well before the federal budget was tabled in parliament — that it may change its outlook for India to negative.
Industry was quick to react. Leading industry lobbies said there was now an urgent need to push the reforms programme forward to send the right signal, especially on a uniform goods and services tax, direct tax code and further easing foreign investment norms.
‘Further opening up India in sectors such as aviation, insurance and opening up multi-brand retailing will help improve foreign capital inflows and also improve investors’ sentiment,’ said the Confederation of Indian Industry.
Even S&P has said that India’s ratings can stabilise again if the government implements initiatives to reduce structural fiscal deficits and to improve its investment climate, with a series of decisions.
‘Fiscal measures could include an increase in domestic prices and a more efficient use of fuel and fertiliser subsidies, or an early implementation of the goods and service tax,’ Ogawa said during the conference call.
At the same time the agency said high fiscal deficits and a heavy debt burden remain the most significant constraints on ratings and expected only modest progress in reforms, given the current political gridlock and the impending elections in May 2014.
The agency rates countries based on factors including political risks, growth prospects, external liquidity, international investment position, fiscal performance, debt burden, and flexibility of the monetary system.
According to experts, a shift in the outlook from stable to negative means a country’s credit rating stands the risk of a downgrade. In that event, the risk factor of lending money to the country rises, makes its sovereign bonds less attractive.