S&P warns of India’s ratings downgrade post-2014 election

Global ratings agency Standard & Poor’s (S&P) on Thursday maintained ‘œnegative’ outlook on India’s sovereign ratings and warned of a likely downgrade if policy drift continued after the 2014 general election.

Global ratings agency Standard & Poor’s (S&P) Thursday maintained “negative” outlook on India’s sovereign ratings and said it may cut it below investment grade if “policy drift” continued under the new government after the 2014 general elections.

The agency affirmed the ‘BBB-‘ long-term and ‘A-3’ short-term unsolicited sovereign credit ratings on India. The outlook on the long-term rating remains negative.

These are the lowest investment grade ratings. Any downgrade would reduce India’s sovereign ratings to junk status making foreign borrowings costlier. 

S&P had cut its outlook on India to “negative” in April last year.

“The negative outlook indicates that we may lower the rating to speculative grade next year if the government that takes office after the general elections does not appear capable of reversing India’s low economic growth,” the agency said. 

S&P said its ratings action would depend on the policy agenda of the new government that would come after the general elections scheduled in first half of 2014. 

“If we believe that the agenda can restore some of India’s lost growth potential, consolidate its fiscal accounts, and permit the conduct of an effective monetary policy, we may revise the outlook to stable. If, however, we see continued policy drift, we may lower the rating within a year,” it said. 

A robust participatory democracy of more than 1 billion people and a free press; low external debt and ample foreign exchange reserves; and an increasingly credible monetary policy with a largely freely floating exchange rate are among the key strengths of India, S&P said. 

These strengths, according to the ratings agency, are counterbalanced by several weaknesses that include onerous burden from its public finance, lack of progress on structural reforms, and shortfalls in basic services typical of a nation with a GDP per capita of $1,500. 

Real per capita growth had averaged more than 6 percent annually for the period 2004-2011 (ended March 31, 2011), and had eased India’s fiscal constraints and poverty levels. But growth has slowed steadily since then to half that level, fraying the social contract and putting at risk the declining trend in government debt, it said. 

S&P said India’s current account deficit is expected to come down to 3.7 percent of the country’s gross domestic product (GDP) by March 2014, mainly because of government restrictions on the import of gold and weaker domestic demand. 

India’s current account deficit widened significantly in 2013 to about 5 percent of GDP, the highest in more than a decade, which had seen deficits more in the range of 1-2 percent of GDP. 

The deterioration of the current account and changing perceptions about global liquidity conditions weakened confidence in the rupee, leading to a 22 percent fall in its value against the dollar between May and August this year.


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