Keeping up the pressure on the UPA-II government to not only push through key economic reforms on paper but also ensure their expeditious implementation on the ground, global agency Standard & Poor's (S&P), on Wednesday, cautioned that India’s sovereign credit rating could be downgraded to ‘junk’ status within 24 months if the authorities failed to take adequate steps to contain the fiscal deficit and improve the investment climate.
In its rating outlook on India in a report titled ‘Asia-Pacific sovereigns: A bit of stability in the sea of uncertainty?,’ S&P said: “A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow.”
Having downgraded India’s rating outlook to ‘negative’ from ‘stable’ on April 25 this year, S&P analysts Takahira Ogawa and Elena Okorochenko, in their latest note, said: “The negative outlook signals at least a one-in-three likelihood of a downgrade of the sovereign rating on India within the next 24 months”.
At present, India’s sovereign rating is ‘BBB-‘(Negative), the lowest notch in ‘investment’ grade and a further lowering to ‘speculative’ grade or ‘junk’ status would imply a much higher cost of overseas borrowings by corporates. Alongside, however, holding out that there could still be light at the end of the tunnel, the S&P note went on to say: “On the other hand, we may revise the outlook back to stable if the government implements initiatives to reduce structural fiscal deficits, improve its investment climate, and increase growth prospects”.
The rating agency went on to indicate that it expected the government to put in place fiscal measures to lower deficits and these “could include a more efficient use of fuel, fertilizer, and agricultural subsidies, or the implementation of a goods and service tax.”
Pointing to the current economic and political environment in India, the S&P said: “The weaker global economic outlook and domestic policy instability contributed to deteriorating growth prospects and investor confidence in the country. In our view, there is a significant chance that this trend could eventually affect political, economic, fiscal or external factors to lower the credit rating on India”.
At the same time, the rating agency appeared to acknowledge the government’s recent efforts towards rectifying the economic ills. S&P also pointed out that the political cost in pushing the reforms has become apparent, with one member of the coalition quitting. As a result, the coalition has become the minority in both the upper and lower houses of Parliament. “Although the ruling coalition expects support from friendly parties, the political condition tends to become more fluid ahead of the general election expected in 2014. The foreign ownership reforms for the insurance and pension business are likely to become more challenging as they need parliamentary approval,” it said.
PTI reports from Mumbai:
Downgrades SBI, UBI
Standard & Poor’s, on Wednesday, downgraded credit ratings of State Bank of India (SBI) and Union Bank of India by a notch, but the banks said it would have no impact on them as the agency had only brought the rating on a par with the sovereign rating.
“We revised the standalone credit profile (SACP) of SBI to ‘BBB—’ from ‘BBB’, and that of UBI (Union Bank of India) to ’BB+’ from ‘BBB—’ based on our anticipation of the banks’ weak asset quality performance,” S&P said in a statement.
SBI said the downgrading will have no impact on it as the rating agency has only brought the rating on par with the sovereign rating.
“This is not a downgrade per se, but only an equalisation of our ratings with that of the sovereign,” SBI chairman Pratip Chaudhuri said, implying that the announcement by the world’s largest rating agency will have little impact on the bank’s ability to raise overseas funds.
Union Bank of India said it will have no impact on the bank’s fund—raising as it has no plan to mop up overseas funds in the immediate future.
