S&P says 1 in 3 likelihood of India downgrade in 24 months

S&P roiled domestic markets in April when it cut India's sovereign outlook to "negative", putting at risk the country's current rating of "BBB-", the lowest investment-grade rating by the agency. India is the only Asia Pacific (APAC) nation to see negative outlook for the Eurozone instability, S&P pointed out.

Also, it feels Eurozone instability is still a risk to APAC sovereign ratings. 

This comes even though the government had raised the price of heavily subsidised diesel last month to rein in its fiscal deficit and fight the threat of becoming the first of the big emerging economies to be downgraded to junk. The long-awaited decision follows intense pressure on Prime Minister Manmohan Singh to plug one of the biggest drains on the treasury. The UPA government is also grappling with a sluggish economy and a slump in investment.

S&P believes India downgrade likely if growth prospects dim, external position deteriorates, political climate worsens or fiscal reforms slow. "The implementation of announced reforms remains a key," Tan said adding, the outlook may be revised to stable if reforms implemented, investment climate stabilises and structural fiscal gap issues are addressed.    

Tan said the agency sees India FY13 current account deficit at 3.5% and the fiscal deficit at 6% of the GDP. "Expect the RBI to remain cautious in conducting the monetary policy," he said.

Downplaying the possible downgrade, Prime Minister's Economic Advisory Council chairman C Rangarajan said the S&P warning is "exaggerated". However, he assured that actions are being taken to control fiscal deficit. He expects the WPI inflation to be around 7% in March.

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Q: Since S&P first put India on the negative watch and now a significant amount of steps have been taken by the government especially on the fiscal deficit front, they have capped the amount of LPG or cooking gas subsidies, they have also raised prices of diesel, would this amount to S&P taking a view that is significant effort has been made, what is the comment now on the rating?

A: This development is to be seen positively in terms of support for the Indian government’s foreign credit worthiness. However, implementation is much more important and some of the things that we view as more important have yet to be implemented. They have been announced, but implementation and results are yet to be seen.

The main concern we have with regards to India sovereign rating is, the slowness or the resistance to reforms could, in the future harm the growth prospects of the economy. If that happens, then we will have to revise ratings downwards. Now some of the measures that have been put could potentially lift India’s potential and therefore we are waiting to see how they are carried out.