Standard & Poor’s sees rosier scene in India

The Indian economy’s strong growth momentum and the government’s commitment to bring down deficits received a tentative thumbs-up from Standard & Poor’s on Thursday when the international ratings agency revised the outlook on India’s sovereign ratings from ‘negative’ to ‘stable’.

The ratings themselves remain unchanged at unflattering levels for now — ‘BBB-’ long-term and ‘A-3’ short-term — but Thursday’s action reverses the agency’s downward revision of its outlook in February 2009, when the global downturn threatened to slow down the Indian economy.

“It reflects our view that India’s macroeconomic environment is getting better compared to a year ago, and our expectation that the economy will remain on a strong growth path and the fiscal position could begin to recover,” S&P’s credit analyst Takahira Ogawa told DNA from Singapore. “India is one of the few countries, besides China, to register strong GDP growth, and where the recovery process has been relatively quick.”

Ogawa also held out the prospect of more good news: India’s sovereign ratings, he said, could be raised if the government continues to reduce public sector deficits materially. But he also cautioned that the ratings could come under “downward pressure” — and be reduced to speculative ‘junk’ status — “if the government continues its loose fiscal policy or there are policy setbacks... that lower India’s medium-term growth prospects.”   
 
Over at the other leading ratings agency Moody’s, there was no indication that a similar ratings action was imminent. “We’re not thinking of doing anything for now,” said Moody’s sovereign analyst for India Aninda Mitra. “We have our independent set of parameters, and review ratings on an ongoing basis.”

Although Ogawa acknowledged that S&P’s action reflected “to an extent a vote of confidence in the fiscal consolidation efforts” under way in India, he noted that India’s overall fiscal profile remained weak, and the ratings were constrained by high government debt and deficits.

Given the “high magnitude of the fiscal deficit”, it would, he said, take “many years” to achieve fiscal consolidation.

Ogawa also flagged the risk that the recent high inflation rate “could derail the stable macroeconomic and interest rate environments.” But he also noted that fiscal consolidation at the central, state, and public enterprise levels over the next several years “will likely restore the government’s policy flexibility, and keep credit fundamentals commensurate with the ‘BBB-’ rating.”

India also faced other risks, such as a slow recovery or even a sharp slowdown of the global economy, or, inversely, a spike in oil prices, which could “undermine the fiscal position.”

There were still many “uncertainties”, Ogawa said, and if the promised fiscal consolidation doesn’t come about “we may consider whether to revise our outlook again.” But at this stage, he added, “we still have a bit of a positive view on fiscal consolidation.”

Ogawa said he expected India’s economy to grow 8% this year - higher than many other countries’, and even higher than S&P’s earlier expectation. In addition, he added, India’s external position was resilient.

Barclays Capital analysts Rahul Bajoria and Krishna Hegde noted that short-term policy focus in India would remain on financing the deficit without crowding out private investment. The disinvestment program would likely be well received, they reckoned, “although we see risks that the FY10-11 fiscal deficit will exceed our forecast of 4.5% of GDP.”

In their estimation, the RBI would wait for “further clarity on the nature and timing of the government borrowing before normalising rates.” But given the WPI inflation, the RBI would likely raise the repo and the reverse repo rates 150 basis points this year, starting with 50bp each in April.