Rating Downgrade Threat Still Looms Large

Media reports say that on March 15, 2013, international ratings agency S&P has warned India that it may downgrade the country's rating if the growth prospects of the economy don't improve, the fiscal and current account deficits miss their estimated target, the political climate worsens and the pace of fiscal reforms gets slower. India’s current rating is ‘BBB-’ and hence, according to the ratings agency, there is a 33.33% chance that India’s rating may be downgraded within the next 24 months. This was a major news item today, which took the market southwards to end the day over 0.5% lower.

According to the report, S&P Senior Director Kim Eng Tan has said that the, “Government budget showed fiscal prudence, but higher spending targets posed a risk”. The Indian economy has seen a drastic fall in its GDP growth, which is evident from the fact that from the nearly 9% growth seen in 2011, the economy is now growing at half its pace (4.5% as of the December quarter of 2012).

Thus, it is clear that a potential downgrade on India's rating still casting a shadow over the Indian economy. So far, it is the government’s reformist stance since mid-September 2012 which has given the ratings agencies some pause.

The Union Budget 2013-14 had shown some sense of confidence, at least on the fiscal deficit front, with the FM keeping his promise of maintaining this at 4.8% for FY2014. Another positive takeaway was that the set target for the fiscal deficit for FY2013 was revised downward by 10 basis points to 5.2%. However, market participants had expected the FM to provide more measures on the growth front, which was missing.

Further, the government is surely expected to continue with its reformist action going ahead, and the RBI would also join in with rate cuts ahead in the year, which would spur the investment climate and revive the growth prospects of the economy. These look like the only possible triggers to dispel the dark clouds of ratings downgrade.