S&P warns India could face junk status

May 18, 2013
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, NEW DELHI, May 18 – India faces at least “a one-in-three” chance of losing its prized sovereign grade rating, global ratings agency Standard and Poor’s has warned, amid new threats to economic growth and reforms.

The announcement surprised the finance ministry which had been pitching for a ratings upgrade, saying the government has taken strong steps to improve India’s public finances, promote investment and revive growth.

India’s BBB-minus investment rating is already the lowest among its BRICS peers Brazil, Russia, China and South Africa, and cutting it to “junk status” would push up the country’s hefty borrowing costs as it would signal higher risk.

“There is at least a one-in-three chance that we will lower the ratings in the next 12 months,” S&P said late Friday, adding “risks to India’s growth from stalled reforms in parliament still tilt the credit risks to the downside.”

The warning from S&P, which cut the outlook on India’s BBB-minus rating to negative from stable last year, came after parliament adjourned early amid opposition uproar over corruption scandals.

The shutdown stalled the economic reform drive by Prime Minister Manmohan Singh’s minority government, hobbled by a string of graft controversies with two cabinet ministers entangled in scandals quitting late last week.

The government has opened up the retail and aviation sectors to wider foreign investment and partly freed fuel prices. But it has been striving to pass other bills to open the the insurance and pension sectors to more overseas investment and streamline industrial land acquisition to spur economic growth.

Leading business group, the Confederation of Indian Industry, called S&P’s economic outlook “harsh” and said the government was making efforts to rein in the ballooning current account deficit — the broadest measure of trade.

Meanwhile, the chief economic advisor to the finance ministry, Raghuram Rajan, described S&P’s comments as “disappointing”.

But with the 2014 elections looming, analysts say Singh is fast running out of time to complete his legislative reform agenda.

“The big worry is they may have nothing to show in their report card,” said Parsa Venkateshwar Rao, a columnist for the DNA daily.

S&P said it may also cut India’s ratings if it decides Asia’s third-largest economy will not revert to higher seven to eight percent growth levels notched up earlier in this decade.

India’s growth right was bumping along at 5.0 percent for the last financial year to March 2013, the lowest level in a decade, but the government expects it to pick up to six percent this year and is targeting seven percent in 2014.

S&P credit analyst Takahira Ogawa said, “We have indicated compared to one year ago, there is some easing of the pressure towards the downgrade of the rating.”

But despite government efforts to cut red tape in implementing long-delayed infrastructure and power projects, its “success in raising investment growth remains uncertain”, he added.

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