S&P revises India rating outlook to negative on rising deficit, debt

International ratings agency Standard and Poor’s has revised India’s long-term sovereign credit rating outlook to negative from stable. However, the long-term sovereign rating has been affirmed 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 foreignownership of various sectors such as banking, insurance, and retail sectors.”

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 downgradeis likely if the country’s economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow,Ogawa said.

Reacting to the outlook revision, finance Minister Pranab Mukherjee said S&P’s action was “only a revision of outlook, not a downgrade.”

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”.

Stocks slumped 1 percent as soon as news of S&P’s outlook revision trickled in, but have now started recovering. Even the rupee slipped against the dollar.

Siddharth Sanyal, director and chief India economist at Barclays Capital, said 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.”

For the full release click here .