Sensex, Re Slide; Borrowing Abroad Set To Get Costlier
New Delhi: Global ratings agency Standard & Poor’s on Wednesday revised the outlook on India’s long term sovereign rating to ‘negative’ from ‘stable’ – a thumbs down that could adversely affect the way foreign investors view India. S&P’s decision questions the India story by citing its sliding growth numbers. It also cites the high fiscal deficit, a growing debt burden and the government’s inability to push through economic reforms.
The agency clarified that the action was not a downgrade but a revision in the outlook based on the current economic situation. It said India’s rating of BBB (minus) is the lowest investment grade rating. S&P’s announcement immediately hurt sentiment in the financial markets and tripped shares, the rupee and bonds.
Experts say the revision in the rating outlook will hit investor sentiment, increase overseas borrowing costs for Indian companies and add another element of risk for Asia’s third largest economy.
Finance minister Pranab Mukherjee intervened to calm jittery markets, saying the government would overcome the difficult phase. “There is no need for panic. The situation may be difficult, but we will be surely able to overcome,” Mukherjee told reporters.
It also comes at a time when growth is slowing, business sentiment is down and the government is battling a string of issues from corruption, questionable laws like retrospective taxation to stinging criticism over stalled reforms. The Union budget unveiled in February failed to boost sentiment and economists raised doubts about the government’s ability to reduce subsidies and meet the budget targets.
FROM STANDARD TO POOR
What Does It Mean?
Business & investment sentiment may be hit; cost of borrowing for Indian companies may go up; foreign money into stock market may slow down; rupee & bonds may be hit; fear of India becoming noninvestment grade (junk grade) lurks
Market Impact
Sensex closes 56 pts down at 17,151, after plunging 190 pts
Rupee falls 26 paisa before recovering to close at 52.50/$
How Can India Avoid A Downgrade?
Basically, India has to reduce its fiscal deficit – that is, lower the gap between govt spending and its income
Steps that might help prevent a downgrade are:
Cut fuel, fertilizer subsidy Allow FDI in banking, insurance & retail Roll out GST quickly Tackle high inflation
Countries With Same Rating As IndiaAzerbaijan, Barbados, Colombia, Croatia, Iceland, Montserrat, Panama, Morocco and Tunisia S&P expects only modest progress
New Delhi: “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.
Analysts say the announcement should serve as a wakeup call for the UPA government and the coalition should announce measures to kickstart the economy and boost sentiment. Foreign investors have slammed the government for policy uncertainty and its budget move to amend the Income Tax Act from 1962 to ensure it can tax mergers and acquisitions involving foreign companies with assets in India.
The ratings agency said it expects only modest progress on fiscal and overall economic reforms before the 2014 general elections, a view expressed recently by the finance ministry’s own chief economic adviser, Kaushik Basu, although he later said some of his comments had been wrongly quoted.
“High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle -- with the next elections to be held by May 2014 -- and the current political gridlock,” S&P’s Ogawa said. “Such reforms include reducing fuel and fertilizer subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors.”
Moody’s Analytics, a division of Moody’s Corporation, said India’s economy is now growing below potential as a combination of bad luck and poor economic management weighs on sentiment. “The single biggest factor weighing on the outlook is the Indian government. In all economies it is impossible to separate the economic from the political outlook, and that is particularly the case in India...The wave of government reform and opening up through the 1990s lifted GDP growth above 8% before the global financial crisis hit. But these reforms have stopped,” Glenn Levine, senior economist at Moody’s Analytics, said in a statement.
Times View T here are two ways in which the government can respond to the S&P move. One is to bristle and say that it’s unfair and that countries in much more precarious positions than India have been given a higher rating. That would be the wrong option to take, even if there is some merit in the argument. The other option, which is to treat this as a wake-up call, will actually serve the country’s interest better. Clearly, the runaway subsidy bill and the consequently rising fiscal deficit is something that needs to be reined in. Equally, we need to push ahead with pending reforms not because S&P or other credit rating agencies want us to do so, but because it is in our own interests.
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