S&P warns of downgrade, government not too worried

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    New Delhi, (IANS) Ratings agency Standard & Poor’s (S&P) Friday said its outlook on India remained negative and there is a one-in-three chance of a downgrade within the next 12 months. But the government asserted that there is nothing to worry about as it is taking the right measures to keep the country on a sustainable growth path.

    “The outlook on the long-term rating remains negative,” S&P said in a report, affirming its ‘BBB minus’ long-term and ‘A-3′ short-term unsolicited sovereign credit ratings on India.

    This is the lowest investment grade rating. Any downgrade would take India’s sovereign ratings to junk status, making overseas borrowings difficult and costlier.

    The agency’s ratings came just within a month of the government’s meeting with the representatives of S&P here during which it made a strong pitch for an upgrade.

    The Indian government expressed disappointment over the observations of the ratings agency and said it would continue to take steps to boost economic growth and curb deficits.

    “I think it is a narrow way of looking at reforms,” Economic Affairs Secretary Arvind Mayaram told reporters here.

    “We are on the right track, and I don’t think there is anything to worry about,” said Mayaram.

    Added chief economic advisor in the finance ministry Raghuram Rajan: “It is disappointing that S&P has not seen it fit to improve its outlook for India, especially given that it acknowledges the important steps taken by the Indian government in recent months.”

    “International institutional investors, who have invested over $17 billion into India so far this year, do seem to have a different view. The government will continue to do what is necessary to keep India on a stable, sustainable, and strengthening growth path,” Rajan said in a statement.

    S&P’s report came at a time when Finance Minister P. Chidambaram was in Paris to woo overseas investors by selling India’s growth story.

    The agency, however, said there was scope to upgrade India’s sovereign ratings if the government unleashes public and private investments to spur economic growth.

    “High fiscal deficits and a heavy government debt burden remain the most significant constraints on our sovereign ratings on India. Nevertheless, the government has regained control of public finances and embarked on fresh structural reforms since September 2012,” S&P credit analyst Takahira Ogawa said.

    India’s long-term growth prospects, underpinned by its favourable demographic profile, and its high foreign exchange reserves support the ratings. The country’s large fiscal deficit and debt, as well as its lower middle-income economy, constrain the ratings, S&P said.

    The negative outlook signals at least a one-in-three likelihood of a downgrade within the next 12 months.

    “We may lower the rating if we conclude that slower government reforms than we currently expect would not lead economic growth to recover to levels experienced earlier this decade,” it said.

    “Such a conclusion could come from anaemic investment growth, reversals on diesel or other subsidy measures, or inability to increase electricity supply to meet increasing demand. Similarly, if India’s general government fiscal or current account deficits worsen contrary to our expectations, we may lower the ratings,” it added.

    According to the ratings agency, India’s real GDP per capita growth is likely to rebound to 4.6 percent in the current financial year from 3.6 percent in the previous year.

    These are higher than those of most of its peers’ but substantially lower than about 6 percent on average over the five years up to the fiscal year ended March 2012, it said.

    “We may revise the outlook to stable if the government carries through with its plans to unleash public and private investments, to implement a nationwide government sales tax, or to further trim fuel and fertilizer subsidies,” it said.

    “We believe these measures could restore India’s robust growth, and thereby ameliorate its public debt trajectory,” the agency said.