Standard & Poor’s latest to pin hopes on ‘next government’

S&P’s India sovereign rating report also said that its rating announcement will be made only after the general elections “when the new government has announced its policy agenda”.

This is a departure from its usual practice of announcing the rating in April.

The new S&P timetable will accordingly stretch the timing to at least June 2014. For the present,it has retained the rating for India at the bottom rung of investment grade but with a negative long-term rating outlook.

“If we believe that the agenda can restore some of India’s lost growth potential,consolidate its fiscal accounts,and permit the conduct of an effective monetary policy,we may revise the outlook to stable. If,however,we see continued policy drift,we may lower the rating within a year,” S&P said.

Among the positives for the economy,S&P is upbeat on the leadership of RBI Governor Raghuram Rajan for the financial sector. “We expect the sector,under the new leadership in the central bank to be gradually liberalized and a steady disinflationary environment to emerge,” the report said.

In a similar report,Nomura noted that it is the “possibility of positive surprises on the political front” which have reignited the bullish sentiments in the markets.

The Goldman Sachs report said,“politics is now trumping economics and has expressed optimism over a possible political change,led by BJP’s prime ministerial candidate Narendra Modi coming to power”.

A Barclays note on the S&P commentary said the agency has ruled out a downgrade before the national elections but has pinned everything on them. “S&P has said that if the new government engages in structural reforms to stem the drop in economic growth,then the risk of a downgrade would be lower”.

The rating agency’s comments sent the rupee down to a five-week low of 62.41 to a dollar compared with 62.39 on Wednesday. It fell to a low of 62.73 in intra-day trade,its lowest since September 30.

The implications for India of a rating downgrade would be severe. There could be a flight of capital from the country once it loses investment grade as overseas pension and insurance funds whose money is locked in sync with investment grade ratings will pull out.

The sovereign credit rating issued Thursday by S&P points out that India has several key strengths such as a robust participatory democracy and a free press,a low external debt and ample foreign exchange reserves,plus an increasingly credible monetary policy with a largely freely-floating exchange rate.

But these strengths are counterbalanced by significant weaknesses it says.

These include “an onerous public finance load,lack of progress on structural reforms,and shortfalls in basic services typical of a nation with a GDP per capita of $1,500”.

The analysis points out that real per capita growth had averaged more than 6 per cent annually from FY ‘04 to FY ‘11. But growth has “slowed steadily since then to half that level,fraying the social contract and putting at risk the declining trend in government debt”.

S&P added that the challenges for the new government will include placing its fiscal accounts on a firmer footing,phasing out diesel subsidies,financing the expansion of food subsidies and introducing the nationwide common goods and services tax.