S&P downgrades India to negative on fiscal deficit; affirms 'BBB-' rating

Standard & Poor's Ratings Services today downgraded India's long-term sovereign credit rating outlook to negative from stable. At the same time, Standard & Poor's affirmed its 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on
    
It said that the outlook revision reflects its view that India's fiscal position has deteriorated to a level that is "unsustainable in the medium term". 

S&P said it expects general government deficit, including off-budget measures such as oil and fertiliser bonds, to increase to 11.4 per cent in the fiscal year ending 31 March 2009, from 5.7 per cent in the previous fiscal year.
 
"The government has implemented various policies that increase stress on its fiscal position ahead of the general election, which is expected to be held in May 2009," said Standard & Poor's credit analyst Takahira Ogawa. "These policies include debt relief for farmers and a pay hike for government employees--first time in 11 years."
    
Higher global oil prices in the first half of 2008 and the global economic slowdown increased the fiscal deficit size further.
    
"We expect the deficit to remain high at 11.1 per cent in fiscal 2009-2010. The fiscal deficit could widen if the next government implements another stimulus package," Ogawa said.

Although India's medium-term growth prospects are strong, fiscal consolidation could be delayed because of the uncertain near-term economic conditions, he added.
    
With high government debt burden and deficits, its weak fiscal profile has been the single largest negative factor for the sovereign ratings on India. Among the mitigating factors, leading to India's upgrade to 'BBB-' rating in January 2007, was the commitment to fiscal consolidation by various levels of government in the country. However, the fiscal slippage highlighted in the government's interim budget announced on Feb. 16, 2009, reverses the consolidation trend and calls into question such a commitment.
    
India's contingent liabilities are also high. The country's state-owned enterprises (SOEs), including the electricity sector, are generally inefficient. SOEs in oil marketing, fertilizer production, and food handling are more vulnerable to global price changes and more dependent on government financial support, Mr. Ogawa noted.

On the other hand, India's external position is expected to remain resilient. Despite continued dislocation of international capital markets, confidence in India is bolstered by its foreign reserves equal to 374 per cent of short-term external debt.