S&P keeps India long-term rating negative, warns of further downgrade
International rating agency, Standard & Poor’s (S&P) has kept India’s long-term sovereign outlook negative and warned that it would be lowered further within a year if the “policy drift” continued.
It warned that if the government that takes office after the general election in 2014 does not appear capable of reversing India’s low economic growth, it will downgrade rating to speculative grade. However, the rating agency indicated that if it finds 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, it may revise the outlook to stable.
India’s key strengths according to S&P
There are several key strengths of India for eg:
- Healthy participatory democracy of more than 1 billion people
- A free press
- Low external debt
- Ample foreign exchange reserves
- Credible monetary policy with a largely freely floating exchange rate
Factors weakening India’s outlook:
- Heavy burden from public finance
- Lack of progress on structural reforms
- Shortfalls in basic services “typical of a nation with a GDP per capita of US$1,500.”
S&P on India’s Fiscal Defict:
As per S&P, the target of reducing the fiscal deficit to 4.8% of GDP in fiscal 2014 would depend partly on the government’s decision on the amount of election spending and on the evolution of commodity prices.
The rating agency projected a 7.2% of GDP deficit for fiscal 2014 if a broader measure of general government deficits is done.
S&P view on India’s subsidy programmes:
As per the agency, the Indian government has sent mixed signals on subsidy policies. It pointed that the newly added Food Security Programme to expand coverage of food subsidies to almost two-thirds of India’s households could almost double the size of the government’s food subsidy in future budgets to about 1.5% of GDP.
The new government would face the complex task of firming up its fiscal accounts by tackling key issues:
- Terminate diesel subsidies
- Financing the expansion of food subsidies
- Addressing other subsidies such as those for fertilizer
- Introducing the nationwide rollout of a common Goods and Service Tax (GST).