With its focus set on the upcoming general elections, Standard & Poor’s (S&P) on Thursday announced that it would review India’s sovereign rating once the new Government is formed. The global rating agency also said that it might change the country’s rating keeping in view the policy announcement of the new government.
Currently, S&P retained India with its lowest investment grade rating with negative outlook of ‘BBB-’. While affirming the current rating, S&P also cautioned that it could downgrade India to speculative grade if the next Government policies fail to turn around the current economic growth of the country.
Reacting immediately as S&P warned of a possible downgrade, the Indian stock markets plummeted from their intra-day highs and closed under pressure. The benchmark index Sensex fell sharply from its session high of 21,142.85 and finally closed at 20,822.77 levels, 72.17 points down. Similarly the broader index Nifty crashed from its day high and ended the session with loss of 27.90 points at 6,187.25.
Prior to the rating agency’s announcement, most of the sectoral indices on BSE were trading with gains but by the end of the day, out of the 13 sectoral indices, 10 indices closed under pressure. Real estate index fell the most by 2.62 per cent followed by consumer durables and bank index which closed after losing 2.26 per cent and 2.11 per cent respectively. Information technology index was alone trying to support the markets as it ended with 1.25 per cent gains.
Experts citied S&P’s possible downgrade as the sole reason that triggered a heavy selloff in the stock markets. As per S&P’s official statement, “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.”
The vibrancy of India’s democracy will again come to the fore in general elections, which are due no later than May 2014, it noted. S&P said the negative outlook indicates that it 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.
“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,” it said. “If, however, we see continued policy drift, we may lower the rating within a year,” it added.
S&P said 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 fertiliser, and introducing the nationwide rollout of a common goods and services tax.
It noted that power has alternated between the Congress Party and the BJP since 1998. The next Government, regardless of its composition, will face several challenges. The 13th Finance Commission has recommended a Central Government fiscal deficit target of 4.2 per cent of GDP in the fiscal year ended March 31, 2013, S&P said.
Although the current Congress administration tried to close the gap to this target, it did so by having one-off measures such as compressing unspent budget allocations and selling minority stakes of non-financial public enterprises to public sector financial enterprises, it added.
On retaining the India’s rating, S&P said, “Our rating affirmation rests on several key strengths of India. These include a robust participatory democracy of more than 1 billion people and a free press; low external debt and ample foreign exchange reserves; and an increasingly credible monetary policy with a largely freely floating exchange rate.”
These strengths are counter-balanced by significant weaknesses, which include an onerous burden from its public finance, lack of progress on structural reforms, and shortfalls in basic services typical of a nation with a GDP per capita of USD 1,500, it added. Commenting on the rating review, Economic Affairs Secretary Arvind Mayaram said the rating is normal and there nothing worry about.
Asserting that the Indian government has sent mixed signals on subsidy policies, S&P said, on the positive side, the government has decided to deregulate domestic diesel prices and state-owned oil companies are increasing their domestic prices in steps.