Stimulus ‘bad idea’, say economists, rating agency S&P not amused

India’s credit standing internationally is now just a notch above junk. Credit rating agency Standard & Poor’s (S&P’s) on Tuesday lowered the outlook on India’s sovereign rating from ‘stable’ to ‘negative’, citing a deteriorating fiscal situation and a challenging economic environment, made worse by profligate spending by the government.

A downgrade would be bad news for Indian companies, who would have to pay higher interest rates on their overseas loans, since rates are pegged to country ratings. The stock market, too, will feel the pinch, as the world’s big pension funds and risk-averse investors will move to relatively safer markets.

S&P, however, maintained the current long-term sovereign rating at BBB- and the short-term rating at A-3 (both reflecting ‘investment grade’), indicating there was still some leeway for the government to work its way out of the fiscal mess.

“We think there’s still a possibility that India can improve its fiscal  position and avert a rating downgrade,” S&P’s credit analyst Takahira Ogawa told DNA. “If we  didn’t think so, we would have downgraded it right now.”

But even as he said that, the Union government was announcing a  Rs 30,000 crore stimulus package  involving a 2% reduction in excise and service tax. This could bring fetch us a downgrade faster than anticipated.

The latest outlook revision reflects S&P’s view that the fiscal position “has deteriorated to a level that is  unsustainable in the medium term.” The fiscal slippage highlighted in the government’s interim budget presented last week “reverses the consolidation trend and calls into question the government’s commitment (to consolidation),” it noted.

Credit rating agency Standard & Poor’s (S&P’s) on Tuesday lowered the outlook on India’s sovereign rating from ‘stable’ to ‘negative’, citing a deteriorating fiscal situation.
With “high government debt burden and deficits”, India’s “weak fiscal profile” has been the single “largest negative factor” for the sovereign ratings on India, it added.

In the interim budget unveiled by Pranab Mukherjee on February 16, the government disclosed that the fiscal deficit - the gap between revenues and expenditure - had risen to 6% of GDP from the 2.5% projected in February, 2008. And this figure excludes the off-budget subsidies of Rs 95,942 crore for oil and fertiliser companies.

Tuesday’s stimulus package, apart from worsening the fiscal situation still further, has been described by some economists as a “bad idea”.

“Fiscal measures have a cost when the deficit numbers are way off target and may go off further in 2009-10,” said Bibek Debroy, professor at the Centre for Policy Research in Delhi. “The government could have waited for the effect of the previous monetary policy measures to show up.”

Ogawa of S&P said that a rating review would hinge on a post-election government’s fiscal policies, and, in particular, “whether and to what extent it uses its financial assets”. If the next government divests its holdings in state-owned companies, that would improve its fiscal position, he noted.

But it would also depend on external factors, such as the impact on India of the global recession. “The issue is how deeply the Indian economy will tank. If the pace of growth reduction is faster than we think, there will be more pressure on the government to increase expenditure, with implications for the fiscal deficit.”