India credit rating

India Could Lose Investment Grade Status

Fitch Ratings fired another shot across the bow of India’s slowly sinking ship over the last few days, with the director of the region’s sovereign debt team telling the Indian press that the country was at risk of being stripped of its coveted investment grade status in the next 12 to 24 months.

Forbes,

12 August, 2012

“When we say more than likely chance, this essentially translates into more than 50 per cent chance,” Art Woo, Director in Fitch’s APAC Sovereigns team, told the Press Trust of India, or PTI, a national newswire service. The comments were made in reply to emailed queries by PTI journalists regarding a possible downgrade. Fitch lowered India’s credit outlook to negative from stable on June 18, 2012.

India’s sovereign credit is rated BBB-, the lowest level for investment grade bonds. The higher the level, the safer the debt, and the cheaper it is for India to borrow from abroad. India runs a current account deficit and sometimes needs foreign capital to meet government obligations.

Fitch estimates that general government debt is 66 percent of GDP, which is higher than India’s similarly rated ‘BBB’ peers at 39 percent. Meanwhile, India’s government tax revenue in-take is low at 19.4 percent of GDP. And as a result, the central government fiscal deficit climbed to 5.8 percent of GDP in 2011, against a target of 4.6 percent mostly due to government subsidies on agriculture and petroleum.

The outlook revision from June was based on heightened risks that India’s medium- to long-term growth potential would gradually deteriorate if further structural reforms are not put in place. Meanwhile, in the last month, policy paralysis continues in New Delhi. The negative outlook also reflects India’s limited progress on fiscal consolidation within the states and, in particular, on reducing the central government deficit despite improvement in the financial health of those state’s budgets, Fitch said in a press release.

“Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy,” Woo said at the time the negative outlook was published.

The rating affirmation reflects India’s diversified economy and its high domestic savings which reduce reliance on foreign investors for private investment and fiscal funding. The Indian government is able to issue long-term debt at a low cost in its own currency. Net external debt is very low and still high foreign exchange reserves of the Reserve Bank of India (RBI) provide a cushion against potential external lending shocks.