Friday, May 17, 2013

Chidambram Fails To Improve India's Rating

May 17, 2013, 06.34 PM IST

S&P rating signals Indian economy not out of woods yet-Money

S&P's affirmation of negative outlook on Indian economy signals that it is not on ‘road to recovery’ as perceived by the market.
Standard and Poor’s affirmation of negative outlook on India and warning about further chances of downgrade once again have brought forward that all is not hunky-dory yet with Indian economy, experts said.

If India's general government fiscal or current account deficits worsen contrary to our expectations, we may lower the ratings," S&P said in a release on Friday, after affirming India's BBB- rating with a negative outlook.

While markets have rallied in the past week in hopes of rate cut by Reserve bank of India on lower inflation data and due to declining pressure on current account deficit on account of lowering crude and gold prices, the macro picture of Indian economy still remains worrying.

“So I think it is really the probability number that they have attached to the negative outlook or the possibility of a downgrade is what I am somewhat uncomfortable with. At the end of the day the risks that they have cited which are holding back India’s credit rating still remain in place,” Jyotinder Kaur, Economist, HDFC Bank said.

Political uncertainty, delay in passing key bills like Insurance and Pension bill, Land bill and Food bill, delay in clearing key infrastructure project have impeded the reform process.     

“The fact really is even as the government has inched ahead in terms of easing some of the impediments to investment, the roadblock still remains very much in place. It is completely possible that this will continue to constrain India’s credit rating,” Kaur observed.

Agreeing to him, Anubhuti Sahay of Standard Chartered Bank said, “The structural story of India or the structural issues in case of India still remains very much there. Given the increase in political uncertainty, we will probably expect S&P to maintain the negative outlook before we get a new government.”

S&P today said that it may revise the outlook to stable from negative if the government is able to carry through it plans of unleashing public and private investments (for example, by enacting the land acquisition bill), to implement a nationwide government sales tax, or to further trim fuel and fertiliser subsidies.

India’s growth has slipped to a decade low of 5.3 percent in 2012-13, after having an average growth rate of 8-9%.

While recent macro data such as Wholesale and Consumer Price Index and March Index of Industrial Production have been positive, full fledged recovery will still take a long time.  “We need to see a pick up in the growth story if S&P really has to change its overall outlook on the Indian economy,” Sahay said.

Current account deficit

RBI has been pointing time and again that current account deficit is the biggest risk to Indian economy. S&P today mentioned the target of 4 percent for CAD in FY14. Kaur believes that 4 percent of GDP is an achievable target. “There are some risks on the upside to that 4 percent mark, but we are broadly on the trajectory of smaller current account imbalances and I do not see too much risks coming from that at least at this stage despite the scare that we had in the April trade deficit number,” he added. 

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