Rating agencies likely to downgrade India

16 February 2009

India's rising of the fiscal deficit, seen at 6 per cent of GDP at end 2008-09, might lead to downgrade of the country by international ratings agencies. The fiscal deficit for the current year is far higher than the initial target of 2.5 per cent. For the year 2009-10, it is expected to be 5.5 per cent.
 
Both Standard & Poor's and Fitch Ratings have already indicated that they are likely to lower the country's credit rating. Takahira Okawa, a senior analyst at S&P, said they plan to to review India's domestic debt rating after the government's interim budget forecast increased borrowing and a higher fiscal deficit.

Rising outstanding union government federal debt and a worsening fiscal deficit outlook were worrying factors, Takahira Ogawa a senior analyst at S&P, told interviewers.

"The federal debt as a percentage of GDP and the rising fiscal deficit are two significant factors which are constraining ratings and that is something which also may pull them lower," he said, after the budget was presented.

Standard and Poor's currently rates Asia's third-biggest economy's local currency rating at BBB- (minus), the lowest investment-grade level, with a stable outlook. Fitch has a similar rating but with a negative outlook, while Moody's pegs it at one notch lower at speculative grade.

India's fiscal deficit is one of the highest in the world and the two stimulus packages announced in recent months to shore up sagging growth have put pressure on finances, while tax collections have slowed sharply.

"Already, the revised estimates show it at six per cent of the GDP and then next year, it will not come down," said Okiwara. He feels the deficit could go up further depending on the next government's fiscal policy. ''All in all, the direction of the fiscal position of the Indian government is getting worse," he said.