India runs risk of being junked: S&P

Tags: News

Agency says wide fiscal deficit, heavy debt burden big rating constraints for the country

The Indian government’s wide fiscal deficit and a heavy debt burden are the most “significant rating constraints” to the country’s sovereign rating, Standard & Poor’s said, reiterating its warning that India faces a one-in-three chance of being downgraded to junk over the next 24 months.

“Broadly, India’s fiscal profile is a rating weakness,” S&P said in a note, echoing views made in an October note. “Given the political cycle –– with the next elections to be held by March 2014 –– and the current political gridlock, we expect only modest progress in fiscal and public sector reforms,” it said.

The rating agency, which in April cut India’s outlook rating to negative from stable, said it did not expect the government to reach its fiscal deficit target of 4.5 per cent of gross domestic product in the fiscal year that ends in March 2014.

India has a BBB- rating from S&P, the lowest investment grade among the BRIC economies.

“A rating downgrade is likely if India’s economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow,” S&P said.

However, increasing domestic fuel and fertiliser prices, and more efficient use of subsidies could help in stabilising India’s rating, it said.

Asia’s third largest economy grew at its slowest pace in three years at 5.3 per cent in the September quarter and is on track to post its weakest growth in a decade even as a Congress-led minority government struggles to pass key legislative reforms to attract foreign investment.

The ratings agency sees the headline inflation rate, measured by wholesale prices, to remain a risk for growth and low interest rates.

India’s inflation may have picked up in November to 7.6 per cent as a weaker rupee added to the cost of imported fuel, a Reuters poll of 32 economists showed.

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