The Government’s flurry of reform measures and the Finance Ministry’s hard sell to global credit rating majors its intention to control the deficit appear to have gone in vain. International credit rating agency Standard & Poor’s (S&P) on Friday failed to enhance the credit rating on India’s sovereign debt, currently just one level above ‘junk bond’ status.
What’s more, S&P once again warned of a possible ratings downgrade. This will happen if it concludes that slower-than-expected reforms would result in economic growth not recovering to the levels experienced earlier this decade.
Ignoring the call for an upgrade by the Finance Ministry, the agency has reaffirmed India’s sovereign rating at BBB (minus). The outlook on the long-term rating remains negative. A negative outlook implies a one in three chance of a rating downgrade in the next 12 months.
This development has taken place at a time when the Finance Minister is touring abroad to drum up investment. In fact, on Thursday, the British Chancellor of the Exchequer George Osborne lauded Chidambaram’s reform push.
However, in a statement, the agency said the main drag on India’s rating is a high fiscal deficit and heavy Government borrowing, although it also said India’s position had improved over the past year.
“India’s external position remains resilient despite deterioration in the past two years,” said Standard & Poor's credit analyst Takahira Ogawa. However, he added that the current account deficit widened significantly to 4.2 per cent in 2011-12 and is estimated to be 4.5 per cent in 2012-13, the highest in more than a decade. The agency is expecting the current account deficit to improve slightly — mainly because of lower prices of oil and gold — but remain high at about 4 per cent in the current fiscal year. As a result, the country’s ratio of gross external financing needs to current account receipts plus international reserves will increase slightly to 94 per cent in the fiscal year ending March 2014, it added.
The agency has said that demographic profile and high foreign exchange reserve underpin long-term growth prospects. The agency expects real Gross Domestic Product rebounding to 4.6 per cent in 2013-14 from 3.6 per cent in 2012-13. Although this is higher than similar sized economies, it is lower than the around 6 per cent growth averaged over the five years up to the fiscal year ended March 2012.
The agency, though, felt part of this slower growth is cyclical, but rigidities in the labour and product markets and inadequate infrastructure constrain the country’s medium-term growth prospects.
MINISTRY reaction
A statement from the Finance Ministry said: “It is disappointing that S&P has not seen it fit to improve its outlook for India, especially given that it acknowledges the important steps taken by the Indian Government in recent months. International institutional investors, who have invested over $17 billion into India so far this year, do seem to have a different view. The Government will continue to do what is necessary to keep India on a stable, sustainable and strengthening growth path.”