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S&P sees downgrade despite reforms in India

Publication Date : 11-10-2012

 

Global rating agency Standard & Poor's in its fresh assessment of Asia-Pacific economies released yesterday warned India: "It stands one-in-three chance of credit rating downgrade in 2012-13" irrespective of recent enthusiasm displayed by the government in enforcing economic reforms.

Currently India is rated BBB-, lowered from "stable to negative". Besides S&P's, Fitch too has kept the country under constant watch.

The country's sovereign credit rating is under scrutiny on account of uncomfortably high fiscal and current account deficits.

The S&P's warning follows a similar assessment in an IMF report released two days ago. In the IMF's table listing countries with high fiscal deficit, India is placed with a projected deficit of 9.5 per cent which includes deficits of states of the Union. Egypt tops the table with 11.1 per cent.

S&P's analysis says: "A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens or fiscal reforms slow down... After a long wait the government seems to have re-ignited reform efforts," says S&P's analysts Kim Eng Tan who prepared the report titled "Asia-Pacific Sovereigns: A bit of stability in the sea of uncertainty."

The rating agency's latest report covers 22 economies in the region but India is the only country to face negative action during the past six months. Of the 22 countries, most stayed unchanged except the Philippines and South Korea's rise in sovereign credit ratings.

The rating agency's fresh alert on India immediately impacted 10-year bonds yield which moved two basis points to 8.17 per cent. The partially convertible rupee once again dipped under the strong American dollar. Tuesday's end value against dollar was 52.72/73.

Shares on Dalal Street also suffered selling stress as investors and foreign funds became cautious. Risk aversion crept back into their stock dealings.

The report further comments "India's weaker than expected tax receipt owing to weaker economic growth and higher than budgeted subsidies are the main reasons behind the threat of possible downgrade of sovereign credit.

World Bank cuts projection

The World Bank also cut India's growth forecast for the current fiscal to six per cent, from the earlier estimate of 6.9 per cent, citing corruption scandals and uncertainty in policy issues, adds PTI from New Delhi.

“Real GDP growth is forecast to reach around six per cent in 2012-13, after 5.3 per cent growth in the fourth quarter of 2011-12 and 5.5 per cent growth in the first quarter of 2012-13,” the World Bank said in its report on India Economic Update. 

However, World Bank's growth forecast is optimistic compared to other agencies, including IMF. The multilateral funding agency has projected India to grow at 4.9 per cent in 2012, from 6.2 per cent pegged earlier.

The World Bank said it expects inflation to reach as high as eight per cent by March 2013 due to higher domestic fuel prices among other things.

 

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