Credit Suisse, Deutsche Bank see India avoiding junk debt rating

Mumbai: India’s bond risk fell to a seven-month low as Credit Suisse AG and Deutsche Bank AG predict next month’s elections will deliver a government determined to avoid a junk debt rating.

“It would be very embarrassing politically for a government to sit and watch a rating agency cut it to junk,” Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, said in a 6 March telephone interview. “So any government will have an eye on what rating agencies are looking for, which is some continued control on public finances.”

The main opposition Bharatiya Janata Party (BJP) last month criticized the ruling Congress party-led United Progressive Alliance (UPA) fiscal profligacy, even as finance minister P. Chidambaram projected narrower budget deficits for this fiscal year and next.

Standard & Poor’s said in November India may lose its investment-grade rank unless the next administration can boost growth from a decade-low and shore up finances.

The cost of insuring the debt of State Bank of India, a proxy for the sovereign, fell 36 basis points, or 0.36 percentage point, this year to 244, according to credit-default swap data compiled by CMA. It touched 242 on 6 March, the lowest since 24 July.

Similar gauges fell 20 basis points for Brazil, while rising nine basis points for China and climbing 69 for Russia. The rupee has strengthened 0.9% in 2014 to 61.245 per dollar.

Deutsche Bank said the budget gap will narrow gradually regardless of the outcome of the nine rounds of voting from 7 April to 12 May.

‘Well recognized’

“We don’t think the nature of the government is a strong determinant of fiscal outcomes,” Taimur Baig, an economist in Singapore at the German lender, said in a 6 March telephone interview. “The high-debt and deficit issue has been well recognized across all political opinions and expertise.”

The shortfall will narrow to 4.1% of gross domestic product by end-March 2015, from an estimated 4.6% in the current period, Chidambaram said in his 17 February interim budget, which funds the months until the new government takes office.

BJP president Rajnath Singh said the plan lacks credibility because instead of cutting subsidies, it seeks to meet targets by reducing investment in the economy, according to a statement on the party’s website.

Spending ‘bloated’

“India’s spending is bloated largely due to subsidies for electricity, petroleum and food for its 833 million rural population,” Yashwant Sinha, who was finance minister from 1998 to 2002 as part of BJP-led governments, said in December. “Instead, the bureaucracy needs to do a better job of removing supply bottlenecks and controlling inflation,” he said.

“The power of the finance minister in the new government will be key,” Prior-Wandesforde from Credit Suisse said, “as will be the administration’s ability to either cut spending on social welfare or match that expenditure through revenue.”

Narendra Modi, the BJP’s prime ministerial candidate, said on 27 February he backs the introduction of a goods and services tax. Implementation of the levy, which a government panel estimates could generate a Rs28.8 trillion ($472 billion) economic gain by easing commerce, is more than three years behind schedule.

Opinion polls show the BJP winning the most seats while falling short of a majority.

Prime Minister Manmohan Singh’s administration, weakened by an economic slump, graft allegations and the departure of allies, has passed the fewest number of bills of any government completing a five-year term.

‘Political brinkmanship’

“Political parties would have less of an incentive to engage in political brinkmanship once the elections are over,” Tadit Kundu, a Mumbai-based analyst at ICICI Bank Ltd, India’s second-largest lender by assets, said in a 27 February research report.

Smaller regional groups are likely to hold the balance of power and investors should be cautious about betting on a winner, he wrote.

Moody’s Investors Service said on 11 February that any so-called Third Front government, which would exclude Congress and the BJP, may lack a common agenda to revive Asia’s third-largest economy.

Growth near the slowest pace in a decade will make it tough for a government to rein in expenditure, according to Goldman Sachs Group Inc. India’s GDP will expand 4.9% this fiscal year, the government estimates, near the previous period’s 4.5% that was the weakest since 2003.

‘Anaemic’ growth

“No matter who comes to power, it’s going to be a challenge to curb subsidies and control the fiscal deficit,” Tushar Poddar, a Mumbai-based economist at the US bank, said in a 4 March interview. “Real growth in the economy is anaemic and there are huge amounts of spending pressures.”

Reserve Bank of India (RBI) governor Raghuram Rajan is looking to spur growth by taming Asia’s highest consumer-price inflation. He raised the benchmark repurchase rate to 8% from 7.25 percent in three moves since taking office in September. The yield on India’s 10-year sovereign bond has risen one basis point this year to 8.83%.

About 815 million eligible voters, more than double the US population, will pick 543 lawmakers. Results will be announced on 16 May, according to the Election Commission of India, as votes are counted from the Himalayas to islands in the Bay of Bengal. A record 120 million Indians aged between 18 and 22 years will vote for the first time this year, based on the official 2011 census.

The BJP’s Modi is promoting his image as a magnet for investment and a record of stronger-than-average growth in Gujarat that he has ruled since 2001. His main opponent, Rahul Gandhi, is campaigning on the Congress party’s record of spending on programmes ranging from cheap food to guaranteed employment in rural areas.

“We are already seeing a shift away from the traditional areas of entitlements and social identity,” Sanjeev Prasad, senior executive director at Kotak Institutional Equities Pvt. Ltd, wrote in a 5 March note to clients. “India’s emerging demographics will force future governments to focus on economic development and governance.” Bloomberg