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New Delhi/Mumbai: In
a firm warning that all is not well with the Indian economy, the
country's outlook was lowered Wednesday to negative from stable by
Standard and Poors' with the caveat that its credit rating may
also be downgraded.
But the government said there was no need to panic.
As of now, the global ratings agency has kept India's long-term
rating unchanged at BBB minus -- its lowest investment-grade
rating. Any downgrade will not only add to borrowing costs and
assign a "junk" status to India's government bonds but also turn
investors cautious.
"The outlook revision reflects our view of at least one-in-three
likelihood of downgrade if external position continues to
deteriorate, growth prospects diminish, or progress on reforms
remains slow in a weakened political setting," S&P analyst
Takahira Ogawa said.
In a separate action, the agency also lowered its outlook to
negative for four state-run finance companies -- Exim Bank of
India, India Infrastructure Finance Co, Indian Railway Finance
Corp and Power Finance Corp. They, too, stare at a hike in
borrowing costs.
The announcements drew immediate reaction from Finance Minister
Pranab Mukherjee.
"I am concerned, but I don't feel panicky because I am confident
that our economy will grow by around 7 percent, if not plus. We
will be able to control fiscal deficit and it will be around 5.1
percent," Mukherjee told reporters in New Delhi.
The remark came against the backdrop of the S&P analyst assessing
India's gross domestic product (GDP) growth at growth at 7 percent
this fiscal, and the per capital income to to 5.3 percent against
an average of around 6 percent in the past five years.
But what comes as a matter of even more concern is Ogawa's
assessment over a conference call that India's fiscal deficit
could widen to around 8 percent in the current fiscal year,
against the government's budgeted target of 5.1 percent.
"A downgrade is likely if the country's economic growth prospects
dim, its external position deteriorates, its political climate
worsens, or fiscal reforms slow," Ogawa warned.
But the finance minister sought to play down the warning, saying
the government was not only hopeful of meeting growth and fiscal
deficit targets, but will also pursue reforms even while admitting
there were delays due to a number of factors.
Technically, India has been assigned a 'A-3' short-term sovereign
credit ratings. The rating agency had, in fact, warned in February
-- well before the federal budget was tabled in parliament -- that
it may change its outlook for India to negative.
Industry was quick to react. Leading industry lobbies said there
was now an urgent need to push the reforms programme forward to
send the right signal, especially on a uniform goods and services
tax, direct tax code and further easing foreign investment norms.
"Further opening up India in sectors such as aviation, insurance
and opening up multi-brand retailing will help improve foreign
capital inflows and also improve investors' sentiment," said the
Confederation of Indian Industry.
Even S&P has said that India's ratings can stabilise again if the
government implements initiatives to reduce structural fiscal
deficits and to improve its investment climate, with a series of
decisions.
"Fiscal measures could include an increase in domestic prices and
a more efficient use of fuel and fertiliser subsidies, or an early
implementation of the goods and service tax," Ogawa said during
the conference call.
At the same time the agency said high fiscal deficits and a heavy
debt burden remain the most significant constraints on ratings and
expected only modest progress in reforms, given the current
political gridlock and the impending elections in May 2014.
The agency rates countries based on factors including political
risks, growth prospects, external liquidity, international
investment position, fiscal performance, debt burden, and
flexibility of the monetary system.
According to experts, a shift in the outlook from stable to
negative means a country's credit rating stands the risk of a
downgrade. In that event, the risk factor of lending money to the
country rises, makes its sovereign bonds less attractive.
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