S&P's negative outlook on Indian economy: Risk of falling to speculative grade
The new government will face difficult tasks to place its fiscal accounts on a firmer footing: phasing out of diesel subsidies, financing the expansion of food subsidies, addressing other subsidies such as those for fertilizer, and introducing the nationwide rollout of a common goods and services tax.
MUMBAI (Commodity Online): Standard & Poor's Rating Services has affirmed the 'BBB-' long term and 'A-3' short-term unsolicited sovereign credit ratings on India while maintaining a negative outlook on long term ratings. S&P has indicated that rating may be lowered to speculative grade if the new government that comes into power in 2014 proves incapable of reversing India's low economic growth.
"The outlook remains negative, indicating that we may lower the rating to speculative grade next year if the government that takes office after the general election does not appear capable of reversing India's low economic growth.
S&P said that there is a marked slowdown in real growth, which complicates the government's debt dynamics and ability to implement reforms.
S&P views the fiscal deficit target reduction to 4.2% of GDP as a major challenge. "Achieving the government's own fiscal deficit target of 4.8% of GDP in fiscal 2014 will depend partly on the government's resolve on the level of election spending and on the evolution of commodity prices."
The new government will face difficult tasks to place its fiscal accounts on a firmer footing: phasing out of diesel subsidies, financing the expansion of food subsidies, addressing other subsidies such as those for fertilizer, and introducing the nationwide rollout of a common goods and services tax.
"Barring an unexpected deterioration of the fiscal or external accounts before the election, we expect to review the rating on India after the next general elections when the new government has announced its policy agenda. If we believe that the agenda can restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the conduct of an effective monetary policy, we may revise the outlook to stable. If, however, we see
continued policy drift, we may lower the rating within a year."
Sreekumar Raghavan, Chief Strategist at Commodity Online Group said that S&P's outlook on Indian economy assumes significance as external investor perceptions are to an extent guided by it. The implementation of key economic reforms have already been overstreessed but there are external factors beyond the control of Indian government such as commodity prices and global growth prospects which will have impact on the current account deficit (CAD). India has recently taken steps to reduce gold imports and a bearish outlook on crude oil, a major component of Indian import basked will prove favourable for the economy's growth. India needs short term as well as long term foreign investment to restore growth to 8% levels and that in turn is dependent on perception of global investors even if liquidity postiion eases due to stimulus measures being adopted in key nations, he added.
