Standard & Poor's revises outlook on India to negative on 'unsustainable' budget deficit
India's credit rating outlook was cut to negative by Standard & Poor's, in view of country's increasing budget deficit. The downgrade came after the Indian government unveiled a pre-election interim budget which showed the fiscal deficit for this financial year at 6.0 percent of gross domestic product -- more than double from the target.Several ratings agencies have expressed concern about India's deficit but S&P's move marked the first revision of the nation's financial outlook.
(Following is the statement from Standard & Poor's Ratings Services)
February 24, 2009: Standard & Poor's Ratings Services said today it revised the outlook on the long-term sovereign credit rating on the Republic of India 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 India.
The outlook revision reflects our view that India's fiscal position has deteriorated to a level that is unsustainable in the medium term. We expect general government deficit, including off-budget measures such as oil and fertilizer bonds, to increase to 11.4% in the fiscal year ending March 31, 2009, from 5.7% 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% in fiscal 2009-2010. The fiscal deficit could widen if the next government implements another stimulus package," Mr. 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% of short-term external debt.
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