Almost a week after Finance Minister P. Chidambaram indicated that the worst is over for the economy, global rating agency Standard & Poor’s warned of a downgrade but after the general elections next year, if the new government fails to arrest falling growth.
The agency affirmed its ‘BBB minus’ sovereign rating for India, but the outlook remained negative. ‘BBB minus’ is the last investment grade. A notch lower will not only hurt foreign investment flows, but Indian companies will also have to pay more to borrow abroad.
However, the Government seems unfazed. Economic Affairs Secretary Arvind Mayaram advised industry not to worry about S&P. “It is normal,” he said.
S&P’s announcement comes at a time when the stock market closed with a loss in the last three trading sessions, after touching an all-time-high during Muhurat Trading on November 3. Since Diwali, the Sensex has lost over 416 points. The rupee, after remaining firm between 61 and 62 against the dollar, on Thursday ended below 62. It fell to its lowest level in five weeks during intra-day trading on Thursday. This was due to the demand from oil marketing companies. However, by the end of the day it had recovered to close at 62.41 — 2 paise higher than Wednesday’s closing.
In a statement S&P said: “The negative outlook indicates that we may lower the rating to speculative grade next year if the government that takes office after the general elections does not appear capable of reversing India’s low economic growth.” The rating agency said it may review the rating before the elections if there is an unexpected deterioration in fiscal or external accounts.
Giving reasons for affirming the rating, the agency listed strengths such as low external debt, ample foreign exchange reserves and an increasingly credible monetary policy. But these strengths, it said, were counter-balanced by the onerous burden of its public finance, lack of progress on structural reforms and shortfalls in basic services.
On the twin deficits, S&P said achieving the budgeted fiscal deficit target of 4.8 per cent of GDP in 2013-14 will depend partly on the Government's resolve on the level of election spending and how commodity prices move.
“The Central Government's budget balance, however, tells only part of the fiscal story. Using a broader measure of general government deficits, we project a 7.2 per cent of GDP deficit for fiscal 2014, to which one should add 1-2 percentage points of GDP deficits for the unprofitable portions of the consolidated public sector, including state electricity boards and oil-marketing companies.”
The agency expects the current account deficit to narrow to about 3.7 per cent by March 2014, mainly because of the curbs on gold imports and slowing domestic demand.