S&P warns of risk factors to India's stable rating - India

S&P warns of risk factors to India's stable rating

Global credit rating agency Standard & Poor’s (S&P) on Monday warned that the balance of risk factors for the current sovereign credit rating on India may be shifting to negative.

The rating agency, which recently hit the headlines for downgrading the Untied State’s credit rating for the first ever to below AAA, said India’s risk factors included high inflation, a weak government fiscal position, and a slower rate of economic growth.



“Weaker economic growth prospects and high commodity prices could constrain the government's effort for fiscal consolidation,” the rating agency said in a note on Monday.

India currently enjoys a stable rating of BBB- on it sovereign debt. However, it has been grappling with political gridlock and the government’s ability to implement measures to improve economic growth and fiscal prudence will be vital to boosting confidence, S&P credit analyst Takahira Ogawa said. .

“Uncertainty in global financial markets and European sovereign debt problems could add to the pressures on India,” he added.

The risk factors, it said, had affected investor confidence in the rupee’s value, triggering capital flight, which in turn weighed on the sovereign rating.

Indeed, the fiscal deficit – or the difference between the government receipts and spending – touched Rs 3,81,000 crore for nine months ended December 2011. This is 92 per cent of the target of 4.6 per cent of GDP -- or about Rs 4,12,800 crore – set out in the Union Budget in February 2011. A higher fiscal deficit also means that the government will need to borrow more from the Reserve Bank of India; this will release more liquidity into the financial system and eventually lead to even higher inflation.

The central bank has also cautioned against the high fiscal deficit in the past, saying it would hurt growth if a cap was not put on public debt.

And on Monday, the same day as the S&P note, RBI deputy governor Subir Gokarn said “We can't discount the importance of fiscal consolidation contributing to growth. It is not that growth first and then we get fiscal consolidation. They are interrelated.”

While S&P does not expect to downgrade or revise the outlook on India’s long-term rating in the near future. the negative factors, combined with the government's weak policy formulation and implementation, may lead (us) to a tipping point, Ogawa said.