S&P threatens to cut ratings if credit woes continue

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Standard & Poor’s reports that India’s political problems are hurting fiscal discipline. It feels that India must address fiscal problems to avoid a downgrade. It said that India’s rating might be low if credit problems persist.

It reported that the reasons for India’s credit deterioration are temporary and the upside and downside risks to India’s sovereign ratings are balanced. India’s credit profile has worsened in past 12 months.

Takahira Ogawa, Primary Credit Analyst at Standard's and Poor said that the positive and negative factors regarding India ratings are currently balanced. He said that the current India outlook is stable, watching the fiscal state. The rating review will depend on the pace of fiscal deterioration, he added

The fiscal deficit can rise beyond 9% due to high bond issue, Ogawa said. According to him, India’s external position still looks strong currently. He feels that India's current account deficit is not a major concern for now and will be mitigated by investment growth.

Speaking to CNBC-TV18, Ogawa said that the FY09 GDP growth will slow down on high interest rates and inflation. He said that the Reserve Bank of India or, the RBI may hike CRR due to rising inflation. He sees India inflation at 10-11% in FY09, eyeing the oil prices.

Excerpts from CNBC-TV18's exclusive interview with Takahira Ogawa:

Q: What exactly are your concerns and how close is the sovereign Indian rating to a downgrade?

A: Firstly, at this stage our positive and negative factors on the India credit rating is balanced. There is a growing concern on the fiscal position of the government. This is partially because of the global oil price and food price and so on. There are some issues relating to the government policies over the recommendation by the Sixth Pay Commission to increase the salaries of the bureaucrats.

Q: What will be the tipping point? You haven’t yet downgraded the Indian rating to speculative. What could be the exact factor or number? Will you look at a fiscal deficit above 3%, will you look at an extra government borrowing outside the scheduled borrowing programme or will you look at a current account deficit number?

A: We will be looking at all the numbers that could affect the sovereign credit rating before talking about downgrades. At this stage, we still have a stable outlook. If there is something wrong in the next few months or next year, we might change our outlook.

It depends on the pace of deterioration of the fiscal position and it depends on whether the worsening fiscal position is a temporary issue or a long lasting one. All those considerations are necessary. So based on that we are monitoring the situation.

Earlier this year we expected the general government fiscal deficit to be 6.5% of GDP. If there was a measure that has been announced it is implemented. If most of the cost is borne by the issuance of the government bonds then the size of the fiscal deficit could go up higher than 9%.

Even if it were temporary then the situation might be able to be contained. But if this is a structural issue and lasts long, then we might have to see how the government implements its fiscal consolidation measures.

Q: I understand that you will concentrate more on the fiscal numbers. Will the current account deficit not be your prime concern?

A: At this stage it is not the case. Until quite recently the current account deficit was mitigated by the strong inflow from growth, which consists of portfolio investment as well as the foreign direct investment. At this stage portfolio investment is going on. India’s external position is reasonably strong, even the deterioration of the current account balance for this year does not affect it that much in terms of the external balance.

Q: What are you expecting by way of growth? Are you seeing GDP growth under pressure as well?

A: GDP growth might be slower for two reasons. One is that from the middle of last year the pace of growth started to slow down due to higher interest rates and higher inflation, which was quite significantly affected by higher global oil and commodity prices. The economic activity may be slower than last year.

Q: What are you factoring-in by way of a monetary policy action when the RBIs policy review comes up on July 29?

A: Given the higher inflation rate, the RBI might opt for increasing the policy rate. But, it would be some time from now. They might then think about some other policy like a CRR and so on. But at the end of day there is a risk of inflation going higher. So, how the RBI thinks about the future course of inflationary pressure will be the determining factor.

Q: What is the kind of figure are you looking for inflation at the end of the year?

A: It might not be as high as the current level by year-end. But it might not come down to very low levels. I think it will be something around 10-11%. But this depends on the future the oil prices and the monsoon as well.