Samp;P downgrades India rating

NEW YORK, OCT 22: Standard amp; Poor's, the leading global credit rating agency, on Thursday lowered the country's long-term foreign-cur...

NEW YORK, OCT 22: Standard amp; Poor8217;s, the leading global credit rating agency, on Thursday lowered the country8217;s long-term foreign-currency sovereign credit-rating to BB8217; from BB-plus8217; and its long-term local currency sovereign credit-rating to BBB8217; from BBB-plus8217;. However, the short-term foreign currency rating of B8217; was affirmed. At the same time, Samp;P assigned its A-38242; short-term local-currency rating to the country. The outlook on the long-term rating was changed to stable from negative.

Following the series of nuclear tests, the agency, on May 22, had downgraded the country8217;s outlook, while reaffirming its sovereign ratings. The change in the outlook reflected the erosion of the country8217;s external financial position after US and other countries imposed sanctions. The current downgrade reflects fading prospects for meaningful fiscal adjustments, weakening the sustainability of recent economic growth rate and potentially further raising the country8217;s already high external debt burden.

Theconsolidated government deficit including state governments is likely to remain around 8 per cent of the GDP annually over the next three years. The downgrading is expected to make India8217;s borrowings costlier and foreign funds are likely to cut their exposure to India.

General government debt, including debt guarantees increasingly offered by state governments, is likely to exceed 70 per cent of the GDP in the coming years, while interest payments alone are likely to consume nearly half of the central government8217;s revenue.

8220;In the absence of significant fiscal adjustment, public sector debt will grow as a share of the GDP, as real interest rates on government8217;s borrowings begin to exceed the real GDP growth,8221; Samp;P said.

The financing of fiscal deficit, along with that of non-financial public sector enterprises as a whole, could consume nearly 40 per cent of the annual flow of the domestic savings. The inefficient use of much of domestic savings will continue to constrain growth and developmentprospects.

Economic reforms raised the average GDP growth above 6 in recent years, but also raised expectations and political pressure to maintain growth momentum. The trade and financial-sector liberalisation increases the risk of high fiscal imbalances, leading to a larger current account deficit, it said.

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8220;Persistent fiscal pressures in a more liberalised economy will undermine the country8217;s ability to maintain economic growth in the medium term without increasing its current-account deficit and external commercial borrowings, thereby raising its already high external-debt burden. Total external debt is estimated to reach 180 of exports this year, among the highest of rated sovereigns,8221; Samp;P said.

The stable outlook balances persistent high consolidated government deficit with on-going regulatory and structural reforms. The change of government earlier this year once more underscored the resilience of the country8217;s cross-party consensus in favour of cautious reform, which largely insulateseconomic policy from the instability and volatility of weak coalition government. Foreign exchange reserves, which are likely to equal 150-200 per cent of short-term debt this year, are expected to mitigate the risk of a precipitous loss of external confidence even as export stagnates and trade gap widens.

A renewed commitment to trade liberalisation, along with more transparent and consistent policies for foreign direct investment, could stimulate exports and limit the increase in external debt in the medium term. This, along with privatisation and steps to raise cost recovery in public services especially electricity, could improve prospects for a sustainable fiscal corrections and boost the country8217;s credit worthiness. The combination of further fiscal pressures and an inadequate pace of structural reform could result in unsustainable, debt-financed and the country8217;s credit standings, Samp;P said.