Big jolt for India’s chances for an upgrade.

By R. Chandrasekaran

CHENNAI: The Indian government’s efforts to impress upon the rating agencies such as Standard & Poor have failed to have the desired impact. The rating agency has not only reaffirmed its negative outlook on India but also indicated a downgrade threat on doubts over the government’s efforts to prop up investment.

The government, in turn, showed its irritation, and questioned the modalities being adopted by the rating agency.

S&P indicated that it will not mind lowering rating on India if the government reforms fail to lead to an economic uptick, to recover to the levels that India had earlier witnessed this decade. In December too, the rating agency expressed a similar chance of a downgrade in two years if reforms didn’t work.

The rating agency said on Friday that any unfavorable rating could be the result of “anemic investment growth, reversals on diesel or other subsidy measures, or inability to increase electricity supply to meet increasing demand. Similarly, if India’s general government fiscal or current account deficits worsen contrary to our expectations, we may lower the ratings.”

The latest comment from the S&P is a big jolt to the Indian government’s efforts to clamor for an upgrade from the rating agencies, though Moody’s also expressed that there was no change in rating only a few weeks back.

As part of initiatives to impress upon the rating agencies on the seriousness of the government’s commitment towards reforms, Economic Affairs Secretary ArvindMayaram had met the representatives of S&P on April 25. The government had also held a similar exercise with Fitch on April 12.

During an interaction with a television channel and a national daily on the sidelines of the Asian Development Bank’s recent annual conference in India, top officials from both S&P and Moody agreed that the reforms announced by the Indian government since September last was positive.

However, the two rating agencies believed that these were modest and will have little impact in the near term in view of the limitations the Indian economy is facing, especially with regard to policy. They also felt that there were other areas such as weak infrastructure, fiscal deficit, and current account deficit where the government’s policy could continue to face structural obstructions.

The comments from the S&P also came at a wrong time for India as its Finance Minister P.Chidambaram is engaged in hard selling India’s growth story in Britain, France and Qatar. He was especially seeking investments in the infrastructure sector.

The rating agency cited India’s heavy debt burden and higher fiscal deficit as the biggest impediments for its ratings. Though the S&P acknowledged the government’s fresh structural reforms after September last year, India’s current account deficit has crossed the rating agency’s expectations. It sees improvement due to weaker oil and gold prices.

In any case, the government’s recent efforts to project itself as an investor friendly image took a big beating. The rating agency’s comments were more or less similar with the Reserve Bank of India Governor Dr. D. Subbarao, who wanted the government to take more concrete steps as reducing interest rates alone will not stimulate growth.

To contact the author, e-mail: rchandrasekaran@americanbazaaronline.com