Mumbai, Sept. 19: Standard and Poor’s (S&P) today downgraded India’s long-term sovereign local rating because of concerns over parlous public finances and stop-go reforms.
It slashed the long-term sovereign local rating to “BBB-” from “BB+” and the short-term local currency credit rating to B from A-3, a release issued from New York said. However, the BB long-term and B short- term foreign currency sovereign rating has been retained.
India is the eighth country to have lost its investment-grade rating on its local currency debt since the agency began grading local currency debt in 1990.
A yawning fiscal gap and tardy pace of reforms led to the decision. The agency’s worries the government was teetering on the edge of a fiscal precipice were stoked when sale of public sector companies, which would have given it much-needed cash for welfare, was stonewalled by Cabinet hawks loath to loose their fiefs.
S&P managing director John Chambers said the local currency downgrade reflects the government’s growing rupee debt burden and its inability to revamp public sector.
With spending overwhelming income from taxes, the government has been on a borrowing binge, pre-empting funds that would have otherwise been lent to companies. This has kept cost of funds high, despite the Reserve Bank of India’s preference for softer interest rates.
“The inability of the leadership to implement announced reform policies in a timely manner contributes to India’s falling credit worthiness,” Chambers said, citing the faltering PSU disinvestment process.
“Political disagreements threaten to set back India’s privatisation programme, which had been a success in the past couple of months,” he added. This hits the government’s credibility, deprives it of revenues that would have come in from the sale of large state-owned firms, weakens investor confidence and raises public debt.
According to the agency, the government’s policy of borrowing mainly in the domestic market, while maintaining controls on capital account flows limits, for now, the impact of fiscal problems on the external sector.
However, the growing local currency debt burden hurts the country’s macroeconomic stability and lowers GDP growth prospects, reducing the government’s ability to raise sufficient tax revenue in the future to service its local and foreign currency loans.
Analysts are divided on just how markets will react on Friday. While a few warn of a-knee jerk response, particularly in the government bond and forex markets, others are of the opinion that since the country’s sovereign foreign currency rating has not been brought down, there will be no major convulsions.