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Apr 25, 2012, 01.06 PM IST | Source: Reuters

TEXT: S&P cuts India outlook to negative from stable

TEXT-SP-CUTS-INDIA-OUTLOOK-TO-NEGATIVE:TEXT: S&P cuts India outlook to negative from stable

(The following statement was released by the rating agency)

India's investment and economic growth have slowed, and its current account deficit has widened, resulting in a weaker medium-term credit outlook. -- Standard & Poor's expects the government to face headwind in implementing policy measures to improve its fiscal and macroeconomic parameters in the near future, given the current unfavorable political environment. -- We are revising the outlook on the long-term ratings on India to negative to reflect at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow. -- We are affirming our 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India.

April 25 -- Standard & Poor's Ratings Services today affirmed the 'BBB-' long-term and 'A-3' short-term unsolicited sovereign credit ratings on India. Standard & Poor's also revised the outlook on the long-term rating to negative from stable. The transfer and convertibility assessment for India is unchanged at 'BBB+'.

"The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting," said Standard & Poor's credit analyst Takahira Ogawa.

(Read main story, S&P cuts India outlook to negative from stable, click http://in.reuters.com/article/2012/04/25/sp-cuts-india-outlook-negative-stable-idINDEE83O03V20120425)

India's favorable long-term growth prospects and high level of foreign exchange reserves support the ratings. On the other hand, India's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings.

"We expect India's real GDP per capita growth will likely remain moderately strong at 5.3% in the current fiscal year ending March 31, 2013, compared with about 6% on average over the prior five years, but down from 8% in the middle of the last decade," Mr. Ogawa said. "India's favorable demography and the increasing middle-class population will undergird its medium-term growth prospects, which in turn will support the sovereign ratings."

India's external position remains resilient despite the deterioration in the past two years. The country's foreign currency reserves cover about six months of current account payments, down from eight months in 2008 and 2009.

Similarly, the country's net external liability position has risen to about 50% of current account receipts, but more than half is related to foreign direct investment and portfolio equity flows, which are less problematic than debt in most scenarios. Currency flexibility also offers a buffer against volatile external flows.

High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle--with the next elections to be held by May 2014--and the current political gridlock. Such reforms include reducing fuel and fertilizer subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors.

The negative outlook signals at least a one-in-three likelihood of the downgrade of India's sovereign ratings within the next 24 months. A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow, Mr. Ogawa said.

On the other hand, the ratings could stabilize again if the government implements initiatives to reduce structural fiscal deficits and to improve its investment climate. Fiscal measures could include an increase in domestic prices and a more efficient use of fuel and fertilizer subsidies, or an early implementation of the goods and service tax.

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