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India needs more reforms,says S&P

Standard & Poor's threatens to downgrade ratings

Written by ENS Economic Bureau | Mumbai/delhi | Published: May 18, 2013 4:07:04 am

Seemingly unimpressed by the government’s efforts to revive its reformist agenda,global rating agency Standard & Poor’s has reiterated its negative outlook on India’s rating and warned that there continues to be a one-in-three likelihood of a downgrade in the next 12 months.

“We may lower the rating if we conclude that slower government reforms than we currently expect would not lead economic growth to recover to levels experienced earlier this decade,” S&P said on Friday,adding that this could happen due to anemic investment growth,reversal on diesel or other subsidy reforms or continued electricity shortage.

It also flagged the high fiscal and current account deficits as threats to the country’s sovereign ratings. “High fiscal deficits and a heavy government debt burden remain the most significant constraints on our sovereign ratings on India,” said Takahira Ogawa,S&P credit analyst.

As part of its latest review,S&P has affirmed its ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit rating with negative long-term rating,which puts India just one step above the junk status.

The announcement comes at a time when finance minister P Chidambaram is on a three nation tour to woo foreign investors. The minister’s Budget 2013-14 also focused largely on easing worries of the investor community and rating agencies through measures for fiscal consolidation and promises of tax certainty.

Not surprisingly,the ratings left the finance ministry visibly unhappy. “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,” said Raghuram Rajan,chief economic adviser,adding that the government will continue to take measures to ensure a “stable,sustainable,and strengthening growth path”.

Economic affairs secretary Arvind Mayaram said,“I think we are on right track and the reform process will continue and therefore I don’t think there is anything to be worried about.” While expressing hope for an upgrade later,Prime Minister’s Economic Advisory Council chairman C Rangarajan said,“S&P has not absorbed the developments over the last few months such as lower inflation,fiscal consolidation and improvement in growth while assigning its credit ratings. India’s savings and investment rates too are high at 30.5 and 34 per cent respectively and will help support growth.”

Both S&P and Fitch had last year cut their outlook on India to negative,warning of a possible downgrade,largely due to slowdown in growth,widening deficit and policy inaction.

India had also pitched for a rating upgrade on the back of a slew of reforms since August last year from S&P last month when its representatives met finance ministry officials led by Mayaram last month.

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