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Mumbai, Feb. 24 Standard & Poor’s Ratings Services has revised the outlook, on the long-term sovereign credit rating on India, to negative from stable. The global credit rating agency reasoned that the revision in outlook reflects its view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term.

With high government debt burden and deficits, its weak fiscal profile has been the single largest negative factor for the sovereign ratings on India, it said.

S&P, however, affirmed its ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit ratings on India.

According to Mr C.Vr. Rajendran, General Manager, Corporation Bank, the revision in outlook is unlikely to have any impact on Indian corporates’ plans to borrow from overseas markets. “The market has learnt to take bad news in its stride. Foreign investors are interested in investing in India. They have the ability to invest. It is just that they are lacking confidence,” he said.

The global rating agency expects general government deficit, including off-budget measures such as oil and fertilizer bonds, to increase to 11.4 per cent in the fiscal year ending March 31, 2009, from 5.7 per cent in the previous fiscal year.

“The Government has implemented various policies that increase stress on its fiscal position ahead of the general election, which is expected to be held in May. These policies include debt relief for farmers and a pay hike for Government employees — first time in 11 years,” said Standard & Poor’s credit analyst Mr Takahira Ogawa. Higher global oil prices in the first half of 2008 and the global economic slowdown increased the fiscal deficit size further. “We expect the deficit to remain high at 11.1 per cent in fiscal 2009-2010. The fiscal deficit could widen if the next Government implements another stimulus package,” Mr Ogawa said.

Although India’s medium-term growth prospects are strong, the analyst pointed out that fiscal consolidation could be delayed because of the uncertain near-term economic conditions. Among the mitigating factors, leading to India’s upgrade by S&P to ‘BBB-’ rating in January 2007, was the commitment to fiscal consolidation by various levels of Government in the country.

However, the fiscal slippage highlighted in the Government’s interim Budget reverses the consolidation trend and calls into question such a commitment. India’s contingent liabilities are also high. The country’s state-owned enterprises (SOEs), including the electricity sector, are generally inefficient. SOEs in oil marketing, fertilizer production, and food handling are more vulnerable to global price changes and more dependent on Government financial support, Mr Ogawa said. On the other hand, India’s external position is expected to remain resilient. Despite continued dislocation of international capital markets, confidence in India is bolstered by its foreign reserves equal to 374 per cent of short-term external debt.

Standard & Poor’s also revised the outlook on the long-term issuer credit ratings of Export-Import Bank of India, Power Finance Corp Ltd, Indian Railway Finance Corp. and India Infrastructure Finance Co Ltd to negative from stable. At the same time, S&P affirmed the ‘BBB-’ long term issuer credit ratings on the four entities.

S&P said the revised outlooks are a reflection of the public policy role of the four financial institutions resulting in their ratings being equalised with that of India’s.

More Stories on : Economy | Credit Rating

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