India’s sovereign credit rating may be lowered because of its “unsustainably high” fiscal deficit, compounded by the absence in Monday’s Budget of a roadmap for fiscal consolidation, ratings agency Standard & Poor’s cautioned on Wednesday.
But it appeared to indicate that there was still a window of opportunity for the central government to avert a lowering of sovereign ratings by reining in its deficits, reducing its subsidy bill and undertaking structural reforms.
The ratings agency had earlier this year revised the outlook on the long-term sovereign credit rating on India to ‘negative’ from ‘stable’, while simultaneously affirming its ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit ratings on India.
A lowering of ratings would push India into the ‘junk’ category, which would increase the cost of overseas borrowings by the government and by companies, and inhibit capital inflows.
“India’s high fiscal deficits are not sustainable in the medium term and if fiscal consolidation is delayed, there is a risk that the sovereign credit ratings on India may be lowered,” noted S&P analyst Takahira Ogawa.
“It’s difficult to say when the rating will be reviewed,” Ogawa told DNA on the phone from Singapore. “One of the things we would like to see is the pace of recovery of the Indian economy in the medium term. If a recovery is delayed, the fiscal consolidation effort too will be delayed… On the other hand, if the pace of recovery is faster, the government will have more room to reduce its expenditure and its revenue position will be better.”
Ogawa said that the government’s Budget deficit of 6.8% of GDP for 2009-10 was within S&P’s expectations, even though it was almost twice as big as the 2.7% deficit recorded in FY 2007-08.
Including state government deficits and off-balance-sheet items such as oil and fertiliser bonds, the deficit is estimated to reach about 12% of GDP in fiscal 2009-2010. “We continue to believe that such high levels of government deficits are unsustainable,” he added.
The Budget contained “no significant information on the roadmap for fiscal consolidation or details on the divestment plan for state-owned companies,” he observed.
However, if fiscal consolidation could be achieved in the next two to three years, the sovereign ratings could be maintained at ‘BBB-’ and the outlook revised to ‘stable’, Ogawa noted.
“We await the 13th Finance Commission report, which must be submitted to the Finance Minister by the end of October, to garner a broader picture on the fiscal consolidation in the medium term.
The contents of the new Fiscal Responsibility and Budget Management Act are expected to guide and safeguard fiscal consolidation at central and state government levels. We believe a separate announcement on the divestment plan or other plans on fiscal consolidation is possible.”
The “hefty fiscal deficits” and debts outstanding (general government gross debt estimated at 85% of GDP at the end of March 2009) were two of the most significant negative factors on the sovereign credit ratings on India, Ogawa noted. The other important rating factors include medium-term growth prospects, inflation rate and interest rates, progress in structural reforms, and net inflow of funds.
“A material deterioration in India’s strong external position —- considered unlikely at this stage —- could also put pressure on the ratings,” he added.
Moody’s Investor Services vice-president and senior analyst Aninda S. Mitra too told DNA that while the headline fiscal deficit numbers as reflected in the Budget “weren’t disconcerting”, there were no specifics in the Budget on structural reforms or a roadmap to to fiscal consolidation.
Mitra said that Moody’s would not be reviewing its sovereign rating on India “at this stage” since there were no “egregious pressures… We are monitoring developments everyday and we will take a decision appropriately.”
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