S&P cuts India outlook to negative, sees no big reforms before ’14 poll Sensex, Re Slide; Borrowing Abroad May Get Costlier

New Delhi: Global ratings agency Standard & Poor's on Wednesday revised the outlook on India's long term sovereign rating to 'negative' from 'stable'—a thumbs down that could adversely affect the way foreign investors view India. 

    The S&P decision questions the India growth story by citing its sliding growth numbers. It also cites the high fiscal deficit, a growing debt burden and the government's inability to push through economic reforms. 

    The agency clarified that the action was not a downgrade but a revision in the outlook based on the current economic situation. It said India's rating of BBB (minus) is the lowest investment grade rating. 

    S&P's announcement immediately hurt sentiment in the financial markets and tripped shares, the rupee and bonds. Experts say the revision in the rating outlook will hit investor sentiment, increase overseas borrowing costs for Indian companies and add another element of risk for Asia's third largest economy. 

    Finance minister Pranab Mukherjee intervened to calm jittery markets, saying the government would overcome the difficult phase. "There is no need for panic. The situation may be difficult, but we will be surely able to overcome," the finance minister told reporters. 

    The revision also comes at a time when growth is slowing, business sentiment is down and the government is battling a string of issues from corruption, questionable laws like retrospective taxation to stinging criticism over stalled reforms. The Union Budget unveiled in March failed to boost sentiment and economists raised doubts about the government's ability to reduce subsidies and meet the Budget targets. 

FROM STANDARD TO POOR What Does It Mean? 

Business & investment sentiment may be hit; cost of borrowing for Indian companies may go up; foreign money into stock market may slow down; rupee & bonds may be hit; fear of India becoming noninvestment grade (junk grade) lurks 

Market Impact 

Sensex closes 56 pts down at 17,151, after plunging 190 pts 

Rupee falls 26 paisa before recovering to close at 52.50/$ How Can India Avoid A Downgrade? 

Basically, India has to reduce its fiscal deficit – that is, lower the gap between govt spending and its income 

Steps that might help prevent a downgrade are: 

Cut fuel, fertilizer subsidy Allow FDI in banking, insurance & retail Roll out GST quickly Tackle high inflation 

Countries With Same Rating As India Azerbaijan, Barbados, Colombia, Croatia, Iceland, Montserrat, Panama, Morocco and Tunisia Funding worry for corporates 

    Indian corporates could see their overseas borrowing costs shoot up should S&P's negative outlook result in an actual downgrade. Their global plans, hugely dependent on international finance, could also take a hit. The rating agency also put three IT companies (Infosys, TCS and Wipro) and three public sector entities (NTPC, NHPC & SAIL) on its negative list. Bankers say international investors will be wary of investing in bonds issued by PSUs because of the downgrade possibility. P 19 

No respite for UPA from allies, oppn 

    On a day S&P identified rising fuel subsidy as one of the reasons for its loss of confidence in India, UPA allies Trinamool and NCP said they would not allow decontrol of diesel prices, even as the government said it was committed to getting on with reforms. The S&P downgrade also gave the opposition a handle. "It is the policy paralysis of the last few years...that is responsible for this mess," BJP's Arun Jaitley said. P 19 Reforms have stopped, says Moody's Analytics 

    The outlook revision reflects our view of at least aone-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting," said S&P's credit analyst Takahira Ogawa. 

    Analysts say the announcement should serve as a wake-up call for the UPA gov. 

    The ratings agency said it expects only modest progress on fiscal and overall economic reforms before the 2014 general elections. 

    "High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle—with the next elections to be held by May 2014—and the current political gridlock," S&P's Ogawa said. Moody's Analytics, a division of Moody's Corporation, said India's economy is now growing below potential as a combination of bad luck and poor economic management weighs on sentiment. "The single biggest factor weighing on the outlook is the Indian government. In all economies it is impossible to separate the economic from the political outlook, and that is particularly the case in India...The wave of government reform and opening up through the 1990s lifted GDP growth above 8%. But these reforms have stopped," Glenn Levine, senior economist at Moody's Analytics, said in a statement.

1-in-3 likelihood of downgrade if external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow... 

Takahira Ogawa | S&P CREDIT ANALYST

No need for panic. The situation may be difficult, but we will be surely able to overcome 

Pranab Mukherjee | FM