Mumbai: India’s credit rating is now just one step away from junk status, as Standard & Poor’s Ratings Services (S&P) on Tuesday lowered its outlook on the country’s long-term sovereign rating from stable to negative because tax cuts and extra spending to win votes and fight the economic slowdown have pushed the fiscal deficit to a record high.
Such a move can raise the cost for local firms borrowing abroad as well as weaken the rupee, though some analysts do not expect that to happen.
Also See Bleak Outlook (Graphic)
The rupee fell to 49.90/92 to a dollar in intraday trade against Friday’s close of 49.72, and closed at 49.87. There was no visible impact on the equity market either. Foreign exchange dealers said the market was worried about the high fiscal deficit.
Interim finance minister Pranab Mukherjee said S&P’s move was not unexpected.
The rating agency maintained its “BBB-” long-term and “A-3” short-term credit ratings for India. Both these ratings are at the lowest rung of the so-called investment grade.
“... India’s fiscal position has deteriorated to a level that is unsustainable in the medium term. We expect general government deficit, including offbudget measures such as oil and fertilizer bonds, to increase to 11.4% (of gross domestic product) in the fiscal year ending March 31, 2009, from 5.7% in the previous fiscal year,” an S&P release said.
Later, S&P lowered its outook on the ratings of 12 Indian banks, including State Bank of India and ICICI Bank Ltd, NTPC Ltd, NHPC Ltd and Indian Oil Corp. Ltd to negative.
The country’s fiscal deficit, excluding off-budget liabilities, is estimated to touch 6% in fiscal 2008-09, much higher than the targeted 2.5%. Mukherjee, in his interim budget for 2009-10, had set a fiscal deficit target of 5.5%.
S&P said the Rs72,000 crore debt relief to farmers and the first pay hike for government employees in 11 years, both made ahead of general elections later this year, added to the stress on the country’s finances, already burdened by higher oil prices in the first half of 2008 and the global economic slowdown. “We expect the deficit to remain high at 11.1% in fiscal 2009-2010. The fiscal deficit could widen if the next government implements another stimulus package,” S&P credit analyst Takahira Ogawa said in the statement.
Although India’s medium-term growth prospects are strong, fiscal consolidation could be delayed because of the uncertain near-term economic conditions, he added.
Fitch Ratings, too, had lowered India’s domestic rating outlook to negative from stable in July, also citing the Union government’s worsening fiscal position. It had maintained the country’s “BBB-” rating for both its local currency rating and its foreign currency rating.
“The revision (in S&P’s outlook) will have no major impact on corporate borrowing,” said Kalpana Morparia, chief executive officer, JPMorgan India Pvt. Ltd. Companies are not borrowing much from abroad anyway, she said.
Abheek Barua, chief economist, HDFC Bank Ltd, doesn’t think the cut in outlook was warranted as “considerable fiscal improvement has happened before the current fiscal slippage under exceptional circumstances”, but expects it to raise overseas borrowings costs by 50 basis points and lead to a further depreciation of the rupee. One basis point is one-hundredth of a percentage point.
Asit Ranjan Mishra and Anup Roy of Mint and Reuters contributed to this story.
Graphics by Sandeep Bhatnagar / Mint