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S&P cuts India currency rating, outlook to negative

Leading international credit rating agency Standard & Poor's on Tuesday downgraded India's sovereign credit rating for both local and foreign currency, to "negative" from "stable" in view of unchecked fiscal deficit and rising domestic indebtedness.

In an assessment likely to impact negatively on India's economy, it also lowered long term local currency rating to 'BBB minus' from 'BBB'.

The local currency rating downgrade reflects unchecked Budget deficits and rising domestic indebtedness. India's Budget deficit, centre and state together, is likely to exceed 10 per cent of Gross Domestic Product (GDP) in current financial year, S&P's said in a release.

Total public debt could approach 70 per cent of the GDP or more than 400 per cent of revenues, which is higher than that of most similarly rated countries, it said.

The rating agency reaffirmed the foreign currency sovereign rating to 'BB' but the outlook has become 'negative' from 'stable' earlier.

The deceleration in GDP growth to about five per cent last fiscal from nearly seven per cent in the late 1990s reflects structural and cyclical factors, S&P's said indicating to slow reforms in the country.

The cost of tardy and shallow reforms is seen in India's poor physical infrastructure, it said, adding chronic power shortages constrain growth and are unlikely to be alleviated without a reversal of populist policies, such as those providing free electricity.

Falling growth prospects, in turn, foreshadow weaker tax revenue and heightened fiscal challenges, the global rating agency said.

The downgrade of the currency was also on the expectation that public finance might worsen further in the years to come as vested interests continue to thwart public sector reforms.

The country's political leadership, cutting across all parties, remains reluctant to forgo patronage opportunities that arise from the bloated public sector, undermining the credibility of India's beleaguered privatisation programme, it said pointing out that in only two out of a total of 240 PSUs government has sold its majority stake.

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