Urgent need to cut fuel and other subsidies

In what may energise the government and the political parties into action to correct the economic maladies, global rating agency Standard and Poor's (S&P), on Wednesday, revised India's rating outlook from ‘stable' to ‘negative' in view of prospects of low growth, high fiscal deficit, high inflation and a widening current account deficit in the prevailing economic environment.

In the event that the current economic ills are not taken care of by the government within a span of 24 months or earlier, the rating agency has warned of a possible downgrade if the fiscal situation and the political climate — by way of being able to take tough economic decisions — do not improve.

The current outlook downgrade is from ‘BBB+' (stable) to ‘BBB-' (negative) which is the last point in the investment grade and any further downgrade would mean junk bond status.

Giving the rationale for its action, S&P credit analyst Takahira Ogawa said: “The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting.”

The reference, it is evident, is to the urgent need to cut fuel and other subsidies, carry out the pending reforms with regard to financial services, direct and indirect taxes and steps to spur growth while containing inflation. Most of these reform and fiscal measures require Parliamentary approval which, in effect, means a battle of numbers or a political consensus.

Outlook for 10 top banks

Alongside, S&P has also scaled down the rating outlook for the country's 10 top banks and 10 leading companies in reflection of the downgrading in sovereign credit rating outlook.

Apart from downscaling the rating outlook for the country's top banks, S&P cut the outlook of 10 major public and private sector companies which include NTPC, IIFCL, SAIL, and software major TCS, Infosys and Wipro. It revised the rating outlook of seven public sector undertakings (PSUs) from stable to negative. These are: Export-Import Bank of India, India Infrastructure Finance Co. Ltd. (IIFCL), Indian Railway Finance Corp (IRFC), Power Finance Corporation (PFC), NTPC, NHPC and SAIL and the rating agency said that this had been done “to reflect the entities' integral linkages with, and their critical roles to, the Government of India”.

It also noted that NTPC, NHPC and SAIL were highly influenced by the sovereign rating given the entities' sensitivity to government intervention in the event of financial distress. However, while it has affirmed the ‘BBB-' long-term issuer credit ratings of all the seven PSUs, it has also affirmed the ‘BBB+' long-term corporate credit ratings on the three software companies.

In the midst of these negatives, what came as a double whammy was Moody's Analytics — a wing of global rating agency Moody's — which stated that India was growing below its potential as politics was weighing on the economy with its national government acting as the “single biggest drag” on business activity. India's outlook was still underachieving and poor management had dragged economic growth to below potential, Moody's Analytics Senior Economist Glenn Levine said.

‘No need to be panicky'

Finance Minister Pranab Mukhejree, while expressing concern over the warning signal, noted that there was no need to be panicky as the government was aware of the economic “difficulties”. “So far as growth and other projections in the budget are concerned, I am confident that we will be able to stick to the numbers and there is no need of being panicky. Situation may be difficult but surely we have confidence that we will overcome these difficulties,” he said.

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