Disappointing that it has not improved its outlook for India: Raghuram Rajan

At a time when ‘green shoots’ of the economy are signalling a turnaround and Finance Minister P. Chidambaram is scouting for infrastructure development funds abroad on the strength of India’s fascinating growth story, Standard & Poor’s (S&P) on Friday handed down a shocker, threatening to downgrade the country’s sovereign rating to ‘junk’ status if the government failed to keep pace with the global rating agency’s expectation on reforms and containment of the twin deficits.

More shocking was the fact that even as the government was looking forward to an upgrade following S&P representatives’ discussions with Finance Ministry officials last month, the rating agency not only reaffirmed India’s sovereign rating at the lowest investment grade ‘BBB-’ with a ‘negative’ outlook but also warned of at least a one-in-three likelihood of a downgrade within the next 12 months.

Significantly, a downgrade from ‘BBB-’ would mean a scale-down to ‘speculative’ grade or ‘junk’ status which renders all overseas borrowings by corporates and other entities costlier.

In a statement, S&P not only appeared to set the pace for India’s economic reforms but also went on to provide the reasons for its rating action. “We may lower the rating if we conclude that slower government reforms than we currently expect would not lead economic growth to recover to levels experienced earlier this decade…India's long-term growth prospects, underpinned by its favourable demographic profile and its high foreign exchange reserves, support the ratings. The country's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings,” it said.

At the same time, while pointing to the high fiscal deficits and a heavy government debt burden which “remain the most significant constraints on our sovereign ratings on India”, S&P credit analyst Takahira Ogawa also acknowledged the fact that “the government has regained control of public finances and embarked on fresh structural reforms since September 2012”.

Not surprising, therefore, that while expressing disappointment over the rating agency’s action and warning, the government seemed undaunted and sought to rebut S&P’s reasoning while pointing to the numerous economic parameters that had not been taken into account. In a statement, Chief Economic Advisor Raghuram G. Rajan said: “It is disappointing that S&P has not seen it fit to improve its outlook for India, especially given that it acknowledges the important steps taken by the Government in recent months.”

Also, in a rebuttal of S&P’s view that the Cabinet Committee on Investments (CCI) success in raising investment growth “remains uncertain”, Dr. Rajan said: “International institutional investors, who have invested over $ 17 billion into India so far this year, do seem to have a different view. The Government will continue to do what is necessary to keep India on a stable, sustainable, and strengthening growth path”. He also noted that the government's “job is not to cater to the rating agencies”, but to change the ground realities on which it is focused.

Indicating that S&P had erred in its view on India’s rating outlook, DEA (Department of Economic Affairs) Secretary Arvind Mayaram said: “I don’t think there is a great deal of concern that one should put on this. I think we are on right track, and the reform process will continue and, therefore, I don't think there is anything to be worried about”.

As for the rating agency’s concern over major economic Bills being stalled in Parliament, Dr. Mayaram said: “There is always an executive space for reforms and government is moving....I think it’s [a] very narrow way of looking [at] reforms” and, therefore, the rating action “does not come as too much of a surprise”.

Curiously enough, even while acknowledging a number of positive economic developments, S&P appears to have chosen to ignore the likely outcome. For instance, the rating agency expects a GDP growth rate of six per cent this fiscal with both headline and core inflation coming down in recent months. As for the current account deficit (CAD), it expects a slight improvement, mainly because of lower prices of oil and gold, at about four per cent. “India's external position remains resilient despite deterioration in the past two years,” Mr. Ogawa said. As to what could lead to a downgrade in rating, S&P said it could be in case of anaemic investment growth, reversals on diesel or other subsidy measures, or inability to increase electricity supply to meet the increasing demand.

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