S&P warns next govt's agenda to determine rating action
New Delhi: Global rating agency Standard & Poor's (S&P) Thursday warned that failure of the new government to come out with a credible growth plan post general elections could result in ratings downgrade for India.
"Barring an unexpected deterioration of the fiscal or external accounts before the election, we expect to review the rating on India after the next general elections when the new government has announced its policy agenda," S&P said in a statement, retaining 'BBB-' with negative outlook.
'BBB- is the lowest investment grade and a downgrade would mean pushing the country’s sovereign rating to junk status, making overseas borrowings by corporates costlier. S&P had cut its outlook on India to 'negative' in April last year.
The agency also said that the rating could be upgraded if the new government takes steps towards pushing growth and reforms. The general elections to elect a new government are due no later than May 2014.
S&P said the negative outlook indicates that it may lower the rating to speculative grade next year if the government that takes office after the general election does not appear capable of reversing India's low economic growth.
"If we believe that the agenda can restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the conduct of an effective monetary policy, we may revise the outlook to stable," it said.
The Indian economy grew at a decade low level of 5 percent in 2012-13. In the first quarter of the current fiscal it grew at 4.4 percent, lowest in four years.
S&P further said that "if we see continued policy drift, we may lower the rating within a year".
The rating action did not cheer the market with BSE Sensex falling for the third consecutive day to close 72.17 points down at 20,822.
Meanwhile, rupee weakened further by 0.34 percent to 62.60 to a dollar towards the end of trading.
Commenting on the rating review, Economic Affairs Secretary Arvind Mayaram said the rating is normal and there nothing worry about.
S&P said the new government will face difficult tasks to place its fiscal accounts on a firmer footing: phasing out of diesel subsidies, financing the expansion of food subsidies, addressing other subsidies such as those for fertiliser, and introducing the nationwide rollout of a common goods and services tax.
It noted that power has alternated between the Congress Party and the BJP since 1998. The next government, regardless of its composition, will face several challenges.
Although the current Congress administration tried to close the gap to this target, it did so by having one-off measures such as compressing unspent budget allocations and selling minority stakes of non-financial public enterprises to public sector financial enterprises, it added.
On retaining the India's rating, S&P said: "Our rating affirmation rests on several key strengths of India. These include a robust participatory democracy of more than 1 billion people and a free press; low external debt and ample foreign exchange reserves; and an increasingly credible monetary policy with a largely freely floating exchange rate."
It added that these strengths are counter-balanced by significant weaknesses, which include an onerous burden from its public finance, lack of progress on structural reforms, and shortfalls in basic services typical of a nation with a GDP per capita of USD 1,500.
Asserting that the Indian government has sent mixed signals on subsidy policies, S&P said, on the positive side, the government has decided to deregulate domestic diesel prices and state-owned oil companies are increasing their domestic prices in steps.
On the negative side, it said the government has secured parliamentary approval to expand coverage of food subsidies to almost two-thirds of India's households. This act could almost double the size of the government's food subsidy in future budgets to about 1.5 percent of GDP.
Referring to fiscal deficit, S&P said achieving government's own target of 4.8 percent of GDP in 2013-14 will depend partly on its resolve on the level of election spending and on the evolution of commodity prices.
India's repressed financial system has accommodated its high fiscal deficits. Real interest rates on government debt are consistently negative.
On current account deficit, S&P said it is likely to narrow slightly to about 3.7 percent of GDP by March 2014, mainly because of government restrictions on the import of gold and weaker domestic demand; many Indians buy gold for investment.
The CAD widened significantly in 2013 to about 4.8 of GDP, the highest in more than a decade, which had seen deficits more in the range of 1-2 percent of GDP.
It also said India's external position is an element of strength for the rating, although there are some fragilities.