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

Rating agency Standard and Poor's (S&P) said there is a significant chance of cutting India's credit rating in the future. "There is 1 in 3 likelihood of India downgrade in the next 24 months," S&P's Kimeng Tan told CNBC-TV18.

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. Also Read:

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Below is the edited transcript of Tan’s interview with CNBC-TV18. 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. _PAGEBREAK_ Q: Which is the specific measure that you are referring which has been announced but not yet implemented and on which you are focused? A: The measures that liberalize its domestic markets particularly, with respect to the multibrand wholesale sector. We are also looking at other measures that could introduce more competition and more level playing field. Basically, anything that could structurally improve India’s competitiveness and productivity to help long-term growth. Q: I actually just wanted to focus on the FY13 fiscal deficit target of 6 percent which you have lined out. Would it be a worst case scenario? What is the 6 percent predicated on? A: This is a forecast that our primary analyst for India has made and it is our base case scenario. However, we would like to point out that the standard government deficit’s definition is to include all national level government plus sub-national level government. So, it is a broad concept of government. It may not be very exact for all the government’s budget. Q: In February we will know exactly what the fiscal deficit will be. Assume it comes around 5.8 percent which is where a lot of economists are pegging it, would that be reason enough for a downgrade or would you still want to wait since your press note says that you are looking at a 24-month timeframe? A: Yes, the main concern is on the structural growth story in India. As long as the fiscal outcome does not deviate significantly worse than what we are currently expecting, I don’t think there will be a risk of credit rating action. We are now focusing more on structural reform and structural growth story. Q: Normally your timeframe is what? From now on do you expect a rating change in 12 months or 24 months, not earlier? A: At the point in time where we assign an outlook change, we would look for an investment grade credit rating on India is 12-24 months, assuming that everything would proceed as we expected. Right now, the government has taken some actions that we did not initially expect. To some extent, that has helped to revise slightly our view on the credit worthiness. Q: The biggest risk to India which will possibly result in a downgrade and could you line it out priority-wise? What are the top three things that you would be watching out for? A: If we see that the reform assets fail and that there is no new effort to try to restore India’s potential growth then it is possible that we could revise down the ratings. Q: Any further reforms that you would be looking for - further reforms, not implementation? A: Implementation is more important. Implementation is what we watch for.