Reform or face downgrade, S&P warns India
17 May 2013
US rating agency Standard & Poor's (S&P) today warned India of an impending downgrade in its sovereign rating to junk grade if the government fails to pursue reforms and check deteriorating fiscal and current account deficits.
S&P said its outlook on India continued to remain negative and there was a one-in-three chance of a downgrade within the next 12 months.
"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.
"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," S&P said in a statement.
'BBB-' is already the lowest investment grade and any further downgrade would push the country's sovereign rating to junk status, driving up overseas borrowing costs for Indian corporates.
"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.
While part of the declining growth is due to cyclical factors, S&P said rigidities in the labour and product markets and inadequate infrastructure puts a damper on the country's medium-term growth prospects.
"Despite the initiatives from the cabinet committee on investments to cut red tape on infrastructure and power projects, that committee's success in raising investment growth remains uncertain," it said.
According to S&AP, India's real GDP per capita growth is likely to rebound to 4.6 per cent in the current financial year from 3.6 per cent in 2012.
The agency said India's sovereign rating could still be upgraded if the government taps public and private investments to spur economic growth.
"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.
India's finance ministry officials have been meeting S&P representatives for the last few months to impress them of the steps being taken to avoid a rating downgrade, although without much success.
