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S&P revises India’s outlook to negative; affirms investment grade at BBB (-)

25 Apr 2012 Evaluate

Credit ratings agency, Standard & Poor (S&P) has revised India’s economic outlook to negative. The reason cited for the downgrade is the large fiscal deficit, low expectations of economic reforms and a slowing down of GDP growth. The ratings agency has slashed its outlook on India’s long-term rating to negative from stable and affirmed its lowest investment grade rating of BBB (-). However, India was earlier rated at BBB levels by the agency.

S&P has further gone ahead and said that there is at least one-in-three likelihood of a ratings downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting (in the next two years). The reforms that the credit ratings agency is referring to is reducing fuel and fertiliser subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors.

S&P has also warned that government's policy reversals may diminish FIIs confidence. The rating agency has pegged India’s GDP growth at 5.3% in 2012-13 as compared to the Indian government’s expectation of over 7%. The agency is also not confident about the government achieving control over fiscal deficit. The fiscal deficit is targeted at 5.1% of GDP for the FY’13 and stood at 5.9% of GDP in FY’12, which is one of the highest amongst emerging economies.

On a slightly more positive note it has stated that India's favorable long-term growth prospects and high level of foreign exchange reserves support the ratings, but they are restrained by large fiscal deficits and debt, as well as its lower middle-income economy.

The government is of the opinion that the rating outlook change was not unanticipated and the good thing is that India's rating has not been downgraded. Moody's has a Baa3 rating on India, while Fitch rates India BBB (-). Both are also the minimum investment grade ratings, one step above so-called junk status. Moody's in December issued a stable outlook for India. 

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