Reforms stuck, India’s credit rating tumbles

In its downgrade, S&P cited poor finances of India’s public sector and its growing debt burden, the setback to reforms and put a question mark over the government’s credibility on reforms.

The downgrade is expected to demoralise the stock and foreign exchange markets and make overseas borrowings costlier. It comes close on the heels of the delay in the disinvestment process and yesterday’s deferment on opening up key sectors to foreign direct investment.

India’s long-term sovereign local rating has been lowered to BB+ from BBB- and the short-term local currency sovereign credit rating to B from A-3, the agency said.

Speaking to The Indian Express from New York, managing director and deputy head of S&P’s sovereign ratings group John Chambers said the new ratings put India at ‘‘the same level as Peru, Costa Rica and Guatemala.’’ And that this was contrary to the ‘‘general’’ upward movement in the rest of the region.

In S&P’s terminology, BB+ or lower is in the ‘‘speculative’’ category, a euphemism for junk-bond status and denoting a high risk of default.

However, the company has affirmed the BB long term and B short-term foreign currency sovereign rating for India. The large fiscal deficit with slow pace of economic reforms would lead to a further rating downgrade, the company said in a release.

S&P’s immediate concern was the unchecked increase in India’s fiscal deficit-led government debt—the debt to GDP ratio is currently around 80 per cent and means that India is gradually approaching a debt trap.

However, CII director general Tarun Das said the move was primarily political. ‘‘What has changed over the recent past to justify this? They don’t understand India. And since there is little borrowing happening, the increase in interest rate doesn’t matter.’’ Pradip Shah, chairman of IndAsia Fund Advisor, said the move was disappointing, but agreed with Das, in that, since there was little borrowing taking place, the increase in interest rate was not significant.

Shah said today’s move would not make a difference to FIIs investing in stock market either. He said, however, the downgrade would affect foreign direct investment, as there is a clear signal that India’s reforms are not moving on track.

In fact, this is what S&P has harped on. ‘‘The government has been unable to contain its growing fiscal deficit,’’ Chambers said. While declining to comment on what needs to be done, Chambers said: ‘‘It would help to do a host of things to lower the fiscal deficit which is running around 10 per cent…press forward for private sector reform in energy companies, removing regulations so that India can markedly improve its human development indicators.’’

‘‘Inability of the country’s leadership to implement the announced reform policies in a timely manner contributes to India’s falling credit worthiness,’’ Chambers said. Citing an example, he said political disagreements threaten to set back India’s privatisation programme which had enjoyed success in recent months.

Chambers claimed that the resulting loss in government’s credibility, along with foregone revenue from the sale of large public sector firms, weakens investor confidence and enlarges the government’s borrowing needs.

In August 2001, S&P lowered India’s long-term local currency sovereign credit rating to BBB- from BBB in August 2001. At the same time, it affirmed its BB long-term and B short-term foreign currency and A-3 short-term local currency ratings last year.