Ratings – a question of timing

Has The political uncertainty of this week made it more likely that India ratings would be downgraded?

Written by Subhomoy Bhattacharjee | Published: September 20, 2012 1:12:35 am

Has The political uncertainty of this week made it more likely that India ratings would be downgraded? The answer it would seem is not so uni-dimensional. A lot depends on how the government budget numbers work out. So,if in response to Mamata Banerjee the government were to cut back on diesel price rise the risks would increase. Diesel subsidy accounts for 63 per cent of the uncovered liability of the government. But if the government were to raise the number of subsidised cylinders to say nine or ten the impact is far more muted as LPG subsidy is just 20 per cent of the total.

More than these numbers the rating agencies will possibly wait till February to see which way the final budget numbers stack up. There will be some indication in the next few days when the RBI will release the government’s borrowing calendar for the second half of the year.

Though the fiscal deficit in all likelihood will be breached heavily,the India ratings will not change right now. All of them allow for some strain on the numbers and Indian budget is surely under strain. What it also means is there is a window for the government to work on to get its act together. But this would need it to cross out signing on any more freebies. Additional responsibilities like right to food and the universal health care programmes will therefore become a casualty. Yet if the government plans to face polls next year,it will need to take these on its menu.

The window also gives space to the government to run through its disinvestment plans in this fiscal. As India is still investment grade,and the public sector papers quality stuff the government can expect strong interest from the markets. The advertisements released on Wednesday for Oil India and for setting up an exchange traded fund to house public sector papers show the time table is working.

Delays can be fatal. A ministry document estimates that every one depreciation of the Indian rupee against the US dollar increases under-recovery of the public sector oil marketing companies by about Rs 8,810 crore,every year. Between July 2011 and August this year the rupee has weakened from 44.42 to a dollar to 55.15,a loss of Rs 10.73. This works out to a loss of Rs 94,531 crore.


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