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Global credit ratings major Standard and Poor's (S&P) has revised the outlook on India's long-term credit rating to ‘negative' from ‘stable.' There was a ‘one in three' chance of a rating downgrade within the next 24 months, the agency warned.
S&P cited slow fiscal progress and deteriorating economic indicators as the reason for its surprise move. For the moment, India's credit rating on its long-term rupee debt has been left unchanged at ‘BBB-' (pronounced triple B minus). This is the lowest investment grade rating issued by S&P.
However, the Government, in an effort to down play such a move, said the agency has only raised a red flag and not downgraded India. The outlook cut will not impact the ability of corporates to borrow abroad, officials said.
S&P's credit analyst, Mr Takahira Ogawa, said, “The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting.”
India's favourable long-term growth prospects and high level of foreign exchange reserves support the ratings. On the other hand, the country's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings, S&P said.
“We expect India's real GDP per capita growth will likely remain moderately strong at 5.3 per cent in the current fiscal year ending March 31, 2013, compared with about 6 per cent on average over the prior five years, but down from 8 per cent in the middle of the last decade,” Mr Ogawa said.
India's favourable demography and the increasing middle-class population will “undergird its medium-term growth prospects, which in turn will support the sovereign ratings,” he added. The agency said India's external position remains resilient despite the deterioration in the past two years. The foreign currency reserves cover about six months of current account payments, down from eight months in 2008 and 2009.
High fiscal deficits and a heavy debt burden remain the most significant constraints on sovereign ratings on India. “We expect only modest progress in fiscal and public sector reforms, given the political cycle — with the next elections to be held by May 2014 — and the current political gridlock.”
A downgrade is likely if the economic growth prospects dim, external position deteriorates, political climate worsens, or fiscal reforms slow, Mr Ogawa said.
A warning, no need to panic: Pranab
The Finance Minister, Mr Pranab Mukherjee, acknowledged Standard & Poor's decision to cut India's rating outlook to negative as a ‘timely warning.' However, he felt there was no cause for panic.
Mr Mukherjee said, “I am concerned but I don't feel panicky because I am confident that our economy will grow at around 7 per cent if not plus. We will be able to control fiscal deficit and it will be around 5.1 per cent (of GDP).”
He also said that economic reforms will be on track. The Government aims to go for the reform process and necessary administrative decisions to ensure that fiscal deficit is retained at projected level. “We should continue to work for higher GDP... We will take note,” Mr Mukherjee added.
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