New Delhi: India, despite the burst of policy reforms, still risks a ratings downgrade, said Standard and Poor’s (S&P), the international rating agency.
“A downgrade is likely if the country’s economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow,” S&P said in a report released on Wednesday. “The negative outlook signals at least a one-in-three likelihood of a downgrade of the sovereign rating on India within the next 24 months.”
Another downgrade would lower the country’s sovereign rating to junk status.
S&P, which had cut India’s rating outlook to negative from stable in April and at the same time warned that there was a possibility of a further downgrade, fears that political pressures may prevent the government from implementing policy pronouncements.
“The main concern that we have with regard to India’s sovereign ratings is that the slowness or the resistance to reforms could, in the future, harm the growth prospects of the economy,” Kim Eng Tan, S&P’s credit analyst, told television channel CNBC-TV18.
S&P cited the political instability facing the government in light of the pullout by coalition partner Trinamool Congress and forthcoming elections in two states to justify its scepticism on the ability of the government to implement promised reforms, especially those that need legislative approval—new pension and insurance laws.
In the last two months, India effected an increase in the price of diesel, limited the supply of subsidized cooking gas and relaxed foreign investment rules governing retail, airlines, and cable and satellite broadcasting companies. The cabinet also recently cleared a proposal increasing the foreign direct investment ceiling in the insurance and pension sectors to 49%.
The S&P advisory came on the same day that the World Bank also announced a lowering of the country’s growth forecast to 6% from 6.9% earlier; the International Monetary Fund had lowered it on Monday.
India’s gross domestic product (GDP) growth slowed to 5.5% in the first quarter of the current fiscal. Based on initial trends from agricultural production and manufacturing, many economists and international organizations have lowered India’s growth to less than 6% for the year to March 2013.
“We have seen a lot of negative news on GDP in the last quarter of the previous year, the first quarter of the current year, exports slowing, IIP (Index of Industrial Production) coming very low,” said Ulrich Bartsch, senior country economist and the author of the World Bank’s latest economic outlook update released on Wednesday.
“The late monsoon, which puts agriculture growth (expectations) lower than thought in May”, is also among the reasons for the forecast being lowered since the June report, Bartsch added on a Facebook chat set up by the World Bank to discuss the economic update.
The lower forecast, the report said, was the outcome of structural problems such as power shortages, caused partly by the poor financial condition of electricity distribution companies, the alleged mining and telecom sector scams, constraints on infrastructure growth and investor uncertainty because of delayed legislative decisions related to taxes, mining and land acquisition.
The report cited medium-term risks from a possible worsening of the situation for European economies leading to a shrinkage of Indian exports and a negative impact on growth from the inability to contain inflation, which is projected to reach 8% by the end of the fiscal year.
S&P expects India’s fiscal deficit to be around 6% of GDP for the year to March 2013 as lower revenue and a rising subsidy bill hurt government finances. A committee headed by Vijay Kelkar, tasked to draft a fiscal consolidation road map, said India’s fiscal deficit will reach 6.1% of GDP if the government fails to undertake remedial measures to make good the likely shortfall in revenue as well as any spillover in expenditure.
With inflation remaining sticky, S&P expects the Reserve Bank of India (RBI) to continue to adopt a cautious stance in the coming months. High interest rates are curbing investment and also making housing and education loans expensive.
Wholesale price inflation rose to 7.55% in August against 6.87% in July, forcing RBI to desist from any rate cut in its monetary policy review on 17 September.
S&P said India’s outlook may be revised to stable if the government implements initiatives to reduce structural fiscal deficits, improve its investment climate and increase growth prospects. “Fiscal measures to lower deficits could include a more efficient use of fuel, fertilizer, and agricultural subsidies, or the implementation of a goods and service tax,” the report said.
Analysts were, however, more optimistic.
Implementation worries have subsided as “with the change in the finance ministry, the government is much more stubborn in taking economic decisions and implementing them despite the risk of political opposition,” said N.R. Bhanumurthy, professor at National Institute of Public Finance and Policy, referring to P. Chidambaram taking over as finance minister in August. “While the measures for cutting subsidies and encouraging private investment made in September have had a short-term impact, the real sector will take some more time to react.”