New Delhi: The proposed food security law will worsen India’s economic imbalance and is a negative development for the country’s sovereign rating, Moody’s said on Thursday.
“The measure is credit negative for the Indian government (Baa3 stable) because it will raise government spending on food subsidies to about 1.2% of GDP (gross domestic product) per year from an estimated 0.8% currently, exacerbating the government’s weak finances,” the ratings agency said in a statement.
Moody’s and Fitch Ratings have a stable outlook on India at their lowest investment grade rating, but Standard & Poor’s has a negative outlook. In May, S&P warned that there was a one-in-three chance of a downgrade in the country’s sovereign rating to junk status in the next 12 months.
Slowing economic growth, rising inflation, a high current account deficit, a sharply depreciating rupee and fluctuating equity markets have increased India’s economic risks.
The worrying economic situation in India is unlikely to deteriorate to a stage similar to that in 1991, when the country had to ask for a bailout from the International Monetary Fund (IMF) to meet a balance of payments crisis, S&P said on Wednesday.
Under the proposed food security law, each beneficiary will be entitled to 5kg of rice, wheat and coarse grains at the subsidized price of Rs.3, Rs.2 and Rs.1 per kg, respectively. About 67% of the population, or 800 million people, will be eligible for the entitlement that will cost Rs.1.3 trillion a year.
Moody’s said on Thursday that India’s fiscal deficit is already higher than that of its emerging market peers.
“Because the Bill will take effect only in the last few months of the fiscal year that ends March 2014, it will not significantly affect the fiscal 2014 budget,” it said. “However, it will raise future subsidy expenditure commitments, hindering the government’s ability to consolidate its finances.”
The government may not add significantly to the Rs.10,000 crore allotted for the Food Security Bill in the budget for the current fiscal, a finance ministry official said, requesting anonymity.
“The food security programme will be rolled out over the next one year, so the pressure on the exchequer will not be much this year. Even next year, we will save around Rs.40,000 crore from diesel price hike, which could be routed to fund the programme while the diesel price hike will take care of the fuel subsidy bill,” he added.
The government has allocated Rs.90,000 crore in total for food subsidy in 2013-14 while its calculations suggest it will need around Rs.1.24 trillion after the food security law is implemented.
The impact of the food security programme on the fiscal situation should not be overstated, according to Madan Sabnavis, chief economist at Care Ratings.
“Irrespective of the burden, the finance minister has clearly stated that he will not breach the fiscal deficit target for the year,” Sabnavis said. “From next year onwards, an economic recovery and higher tax revenue collections will take care of the extra money needed for the programme.”
Moody’s said India’s fiscal deficit contributes to the current account shortfall by keeping domestic demand high, thus increasing imports. “A loose fiscal policy has also underpinned recurrent inflationary pressures,” the agency said. “Inflation further widens the current account deficit by lowering the competitiveness of exports and of import-competing sectors.”
India’s current account deficit stood at 4.8% of GDP in 2012-13 and the government intends to limit it within 3.7% in the year to March.
Finance minister P. Chidambaram on Monday suggested a 10-point programme to revive the economy, but said the immediate priority of the government is to contain the fiscal and current account deficits in the current fiscal year. “We will contain fiscal deficit at 4.8% of GDP and the current account deficit at $70 billion this year,” he told the Lok Sabha.
Meanwhile, the “depreciation of the Indian rupee has varying levels of implications for rated energy and utilities companies in India, but their ratings are not immediately affected”, rating agency Fitch Inc. said in a report on Thursday.
It, however, pointed out that the “risks to stand-alone financial profiles are highest for state-controlled petroleum marketing companies” such as Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd, among Indian energy sector issuers currently rated by Fitch.
This comes in the backdrop of the rupee depreciating by over 25% versus the dollar since the start of this fiscal. While every dollar increase in crude price adds Rs.4,000 crore to the total losses due to selling fuel below cost, every one rupee depreciation against the dollar adds Rs.8,000 crore to it. The losses due to fuel subsidies were earlier expected to be around Rs.80,000 crore by the petroleum ministry. This number is likely to increase, with some estimating the subsidy bill to more than double to around $169.25 billion.
This year’s budget had significantly reduced the petroleum subsidy outgo for 2013-14 by allocating Rs.65,000 crore for 2013-14, a cut of 33% from the revised estimate of Rs.96,879.87 crore for 2012-13.
“The rated oil and gas companies have a significant proportion of foreign currency (FC)-denominated debt,” the Fitch report said. “However, they benefit from varying degrees of natural hedges present in their operations. Utility companies have a much lower proportion of FC debt, and at the same time have the ability to pass on foreign exchange fluctuations as part of their tariff-setting mechanisms, which provides them with greater protection against the depreciation of the rupee.”
This also comes at a time when Prime Minister Manmohan Singh has directed the oil ministry to cut the $25 billion import bill in the current financial year, which may lead to more sourcing of crude oil from Iran with payments in rupees.
“As the ratings of the state-linked entities are either equalized at the same level or constrained by that of the state, any negative rating action on India will have similar implications on their ratings,” the Fitch report said.
India imports 80% of its crude oil and 25% of its natural gas requirements. The country’s demand is expected to more than double by 2035, from less than 700 million tonnes of oil equivalent today to around 1,500, according to the oil ministry’s estimates.