Financial markets were rattled today after international ratings agency Standard and Poor's lowered India's long-term sovereign credit rating to negative from stable. The long-term sovereign credit rating, however, was maintained at 'BBB-'.
"The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting," said Standard & Poor's credit analyst Takahira Ogawa in a press release.
The ratings agency said while India's favorable long-term growth prospects and high level of foreign exchange reserves support ratings, a large fiscal deficit and debt, as well as its lower middle-income economy, constrain the same.
"High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India," it said. "We expect only modest progress in fiscal and public sector reforms, given the political cycle-with the next elections to be held by May 2014-and the current political gridlock. Such reforms include reducing fuel and fertiliser subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors."
In a teleconference to the media, the ratings agency also forecast the current account deficit at 3.7 percent of GDP for the financial year 2011-2012, up from 2.6 percent a year ago. Ogawa said that he expected the current account deficit to remain around 2011-2012 levels in the current financial year.
Experts said the outlook revision is expected to affect companies looking to raise funds abroad, foreign investment flows into the country as well as the rupee's value against major currencies.
Bear in mind that S&P is saying nothing new, really: slow growth, stubborn inflation, a huge current account deficit and a mammoth government borrowing programme to fund a large fiscal deficit have been highlighted by several economists.S&P has merely formalised these concerns in its ratings statement.
It may turn out to be a good thing, because it might finally shake the slumbering government into taking some concrete action on fiscal consolidation and boosting economic growth.
Bad news for the government
Speaking at the teleconference, Ogawa said the government's huge borrowing programme was sucking away funds from the private sector, which is already facing a cash crunch and is being forced to raise capital abroad.
Given slowing economic growth, the ratings agency also estimated India's GDP per capita growth at 5.3 percent for the financial year ending March 2013, versus 6 percent on average over the past five years.
The negative outlook signals "at least a one-in-three likelihood of the downgrade of India's sovereign ratings within the next 24 months," S&P said. A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow, Ogawa said.
Govt rushes to calm markets
As soon as news of S&P's outlook revision trickled in, both the Sensex and Nifty slumped by 1 percent each, while the rupee slipped slightly to 52.60 against the dollar. The government jumped into damage control mode almost immediately. Finance Minister Pranab Mukherjee tried to calm investors by saying that S&P's action was "only a revision of outlook, not a downgrade."
He said there was "no reason to panic" and expressed optimism that the economy could grow by 7 percent in 2012-13.
Indeed, markets buoyed briefly when media reports said another ratings agency, Moody's, had issued its release on India's ratings. However, Moody's Investor Service later clarified to Reuters that it had not issued any new statement on India's sovereign rating and outlook.
Speaking to CNBC TV18, an RBS expert said the cut in outlook was not completely unanticipated and cautioned that a further worsening of the external situation could make things "bad for India".
Siddharth Sanyal, director and chief India economist at Barclays Capital, told the news channel that the markets, both equities and currencies, had given a 'knee-jerk' reaction to the ratings outlook revision. But he added that "S&P's report might continue to remain an overhang on the rupee for the time being. For now, we don't expect any clear-cut change in India's credit rating."
Of course, the onus is now firmly on the government, given the recent 50 basis point cut in its main policy rate, the repo rate, by the Reserve Bank of India. Will S&P's rap finally spur the government to get its act together?
First Published On : Apr 25, 2012 14:57 IST