S&P Cuts India's Outlook to Negative, Warns of Downgrade
Global agency Standard and Poor's (S&P) on Wednesday lowered India's rating outlook to negative and warned of a downgrade in two years if there is no improvement in the fiscal situation and the political climate continues to worsen.
The lowering of outlook from stable (BBB+) to negative (BBB-) is expected to make external commercial borrowings expensive for Indian Inc. It may also have implications for the capital market.
"The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish or progress on fiscal reforms remains slow in a weakened political setting" said S & P's credit analyst Takahira Ogawa in a statement.
BBB- is the lowest investment grade rating. Commenting on the rating action, Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities, said
"Indian (new) sovereign rating is just one step away from junk bond status...Somehow I feel the dream of India growth story is coming to an end".
The negative outlook, the rating agency further said, signals likelihood of the downgrade of India's sovereign within the next 24 months.
"A downgrade is likely if the country's economic growth prospects is dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow", it said.
The lowering of rating outlook comes despite Finance Ministry pitching for an upgrade at the recent round of meetings between the officials and representatives of the S&P.
Terming Standard and Poor's decision to lower India's credit rating outlook to negative as a "timely warning", Finance Minister Pranab Mukherjee today said there is no need to panic as the government is committed to economic reforms.
"I am concerned but I don't feel panicky because I am confident that our economy will grow at 7 per cent, around 7 per cent if not plus. We will be able to control fiscal deficit and it will be around 5.1 per cent", he told reporters in New Delhi.
The Minister, however, said that government will take note of the S&P's decision to lower India's rating outlook to BBB- (the lowest investment grade rating) and work for achieving higher economic growth.
"So economic reforms will be on track. The reform process and necessary administrative decisions required to ensure that fiscal deficit is retained at projected level (will be taken)".
"We should continue to work for higher GDP... We will take note. It is a timely warning", the Minister said
Standard and Poor's, Mukherjee said, lowered India's rating outlook on two counts -inability to achieve 7 per cent growth rate in 2012-13 and failing to stick to the fiscal deficit target of 5.1 per cent of the Gross Domestic Product.
Perhaps because of these two reasons and delay in the process of legislation particularly (those)... related to financial sector reforms, might have been the reasons for coming to this conclusion.
However, they have not downgraded the sovereign debt rating though they have indicated that there is a possibility, he said.
Mukherjee in his Budget for 2012-13 projected a growth of 7.6 per cent and proposed to bring down the fiscal deficit to 5.1 per cent, from 5.9 per cent a year ago.
As regards the projections, the Minister said, "I am confident that we will be able to stick to the numbers... Situation may be difficult, but surely we have confidence that we will overcome these difficulties."
Admitting that there has been delay in passing of certain financial sector reforms bills, the Minister said, "we will try to get these legislations enacted with a broad consensus and I do hope some of the legislations may be enacted during the latter part of the session and surely in Monsoon Session."
The government would discuss the Direct Taxes Code (DTC) Bill in the next session of Parliament, he said, adding that certain other legislations which had received approval of the Standing Committee too would be taken up soon.
The government has not been able to push reforms in insurance, pension, banking and multi-brand retail because of political reasons.