New Delhi: India’s credit rating may come under pressure if Prime Minister Manmohan Singh’s government is not able to rein in a widening budget deficit, Moody’s Investors Service said.
“The stable outlook on the ratings has recently faced growing pressure, mainly due to substantial deterioration in the fiscal position,” Aninda Mitra, a senior analyst at Moody’s in Singapore, said in a report on Thursday. “Inability of the newly re-elected government to meaningfully adjust fiscal policies and push ahead with reforms could pressurize the foreign currency credit rating.”
Moody’s Baa2 rating on India’s long-term foreign debt is the second lowest investment grade.
The ranking is the highest in South Asia after Kazakhstan’s, four levels below China’s, two levels under Malaysia’s and six levels above Pakistan’s.
Singh’s government, which won a second five-year term this month, is borrowing more to fund three stimulus packages to revive growth in Asia’s third largest economy, forecast by the central bank to expand at the slowest pace in seven years.
Higher borrowing widened the budget deficit to 6% of gross domestic product (GDP) in the year to 31 March.
“If the newly re-elected government proves able to quickly outline and sustain a credible programme for reducing consolidated deficits, then the sustainability prospects for general government debt would improve,” Moody’s said in its report. “These trends could boost the outlook for the country’s local currency credit ratings.”
India plans to borrow a record Rs3.62 trillion in the current fiscal year that started on 1 April and estimates the budget shortfall at 5.5% of GDP.
Sustaining economic growth is a “higher priority at this moment” over sovereign ratings, India’s finance secretary Ashok Chawla told reporters in New Delhi on Wednesday.
India has asked the rating agencies to explain the rationale behind their recent warnings on ratings, he said.
Finance minister Pranab Mukherjee had on Wednesday said the government will continue to step up spending this year to support growth, risking a wider budget deficit.
“Let me say unambiguously that we are committed to restoring growth and employment and that would not have been possible without increased spending funded by incremental borrowing,” Mukherjee said. “This would need to be further continued in the current year.”
The comments from Moody’s on Thursday came after Fitch Ratings, which ranks India’s debt BBB-, said on 14 May it expected the new government to step up spending to arrest slowing growth. That would widen India’s national budget deficit, including state government finances, to more than 10% of GDP for a second year in a row, Fitch said.
Singh’s government has unveiled three stimulus packages since December, including lowering retail fuel prices, cutting taxes on consumer products and injecting capital into state-run banks, to shield the economy from the global crisis.
The $1.2 trillion economy may grow by between 6.5% and 7% in the current fiscal year that started on 1 April, the slowest pace of expansion since 2003, Chawla said on Wednesday. The central bank expects economic growth in the current fiscal year at 6%.