Rating Agencies Express Their Views On Indian Economy

One of the leading credit rating agencies, Standard & Poor’s (S&P), has lowered India’s outlook to negative from stable on the back of subdued growth, inflationary pressure and the concerns over widening current account deficit. The news led the broader indices to move southwards. The following are the key points from the report:

• India’s investment and economic growth have slowed, and its current account deficit has widened, resulting in a weaker medium-term credit outlook.
• Standard & Poor’s expects the government to face headwinds in implementing policy measures to improve its fiscal and macro-economic parameters in the near future, given the current unfavourable political environment.
• We are revising the outlook on the long-term ratings on India to negative to reflect at least a one-in-three likelihood of a  downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow.
• We are affirming our 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India.
• On the other hand, the ratings could stabilize again if the government implements initiatives to reduce structural fiscal deficits and to improve its investment climate. Fiscal measures could include an increase in domestic prices and a more efficient use of fuel and fertilizer subsidies, or an early implementation of the goods and service tax.

After a couple of hours of S&P’s view on the Indian economy, media reports stated that Moody’s has reaffirmed India’s rating at Baa3 with a stable outlook. As per the reports, Moody’s said that Indian economy’s strength was moderate on a relative basis, but government finance is the weakest aspect of India’s macro profile.

Investors would now be confused as to whose report should be considered and whom to be looked upon? Two of the biggest rating agencies in the world are giving a contrarian view on the Indian economy. Reacting to S&P’s outlook to India, Finance Minister Pranab Mukherjee said that there is no reason to panic and he was of the view that the India’s economy will grow at 7 per cent and the fiscal deficit would be contained.

No doubt with the RBI cutting the repo rate by 50 basis points to 8 per cent, we could see some pick-up in the growth from the first quarter of FY13. However, inflationary pressure still continues to hover around the economy and remains sticky as of now. The Consumer Price Index for the month of March 2012 came in at 9.47 per cent which is on the higher side. With the rupee again making showing signs of depreciation, this would further impact the economy.

As per the media reports, rupee at 52.58 per dollar is on a three-and-a-half month low. Concerns of current account and fiscal deficit will remain in the economy if the above mentioned factors do not move in a favourable direction. Hence the Indian economy outlook will remain uncertain at least for near to medium term. And therefore it seems that S&P has scored a point over Moody’s macro-economic outlook signifying that the economy is indeed in a pressure cooker situation.