Mumbai: Standard & Poor’s cut its outlook on India’s long-term sovereign credit rating to negative from stable on Tuesday, citing worsening government finances, which could raise firms’ overseas borrowing costs and weaken the rupee.
“The outlook revision reflects our view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term,” said S&P in the statement.
S&P retained its BBB-minus long-term sovereign rating for India and its A-3 short-term rating. Both these are the lowest rung of investment grade.
Finance minister Pranab Mukherjee said S&P’s move was not unexpected, adding the global meltdown has its consequences.
The union government’s finances have deteriorated sharply in the 2008-09 fiscal year which ends in March, after having made decent strides towards fiscal consolidation in recent years as blistering economic growth lifted revenues sharply.
Asia’s third-largest economy has expanded by 9% or more in the last three fiscal years but the government expects it to slow to 7.1% this fiscal year.
“It has a sentimental impact. Right now, not too many corporates are tapping the ECB (external commercial borrowing) market, so it may not have a very large impact,” said Sonal Varma, economist at Nomura in Mumbai.
“In the longer run, it is a negative. It increases the foreign borrowing costs and can lead to outflows and put pressure on the rupee,” Varma said.
The rupee briefly fell to 49.92 per dollar from 49.82 beforehand, while the yield on the benchmark bond stayed steady immediately after the S&P announcement.
It rose 4 basis points to 6.62% after the government announced duty and service tax cuts.
The government expects the budget deficit to widen to 6.0% of gross domestic product this fiscal, its highest in six years, after it increased the salaries of civil servants and waived off loans of small farmers.
Analysts say stimulus packages, including extra spending of $4 billion, aimed at underpinning growth, contributed to a swelling deficit.
India is not alone. Stimulus programmes by Asian governments in recent months are estimated to range between 1% to 12% of their respective GDPs.
But S&P said it expects the general government deficit, which includes off-budget items such as oil and fertiliser bonds, to increase to 11.4% in the fiscal year ending in March, up from 5.7% in the previous fiscal year.
The ratings agency said it expects a fiscal deficit of 11.1% in the fiscal year ended in March 2010, more than double the government’s estimate of 5.5%.
The ratings agency called India’s weak fiscal position “the single-largest negative factor for the sovereign ratings.”
Fitch last week also called the country’s fiscal position its main concern for India. It currently has BBB-minus ratings, with a negative outlook on the local currency rating and a stable outlook on the foreign currency.
Moody’s has an equivalent Baa3 rating with a stable outlook.