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Moody's revises India Ba2 ratings outlooks

Moody's Investors Service lowered the outlooks for India's ratings: to stable from positive for the Ba2 foreign currency country ceiling, and to negative from positive for the Ba2 rating assigned to the Republic of India's domestic currency debt.

The changes reflect Moody's concern that the long-anticipated deepening of macroeconomic reforms has not materialised; indeed, the agency worries that future implementation of needed adjustments will be imperiled by the domestic and global economic slowdown and the fractured cohesion of the coalition government.

In spite of their oft-declared appreciation of the difficult economic situation, policymakers appear to have missed an opportunity to execute the most important elements of the 'second generation reforms' in the early years of the current administration.

Moody's explains that the additional downward pressure on the government's domestic currency rating arises from the absence of a coherent and realistic strategy to curtail the budget deficit and thereby reduce the public debt and debt service burden, even when domestic economic performance was relatively buoyant.

Chronic failures to meet deficit targets, disappointing delays in privatisation of public sector undertakings, and growing contingent liabilities on off-budget appropriations have raised concerns that fundamental adjustments will only come in an atmosphere of crisis.

The agency points out that the recent financial problems at UTI and IFCI highlight the need to improve corporate governance at state-controlled institutions, and the urgency is not limited to lowering the fiscal costs of recurrent public sector bail-outs.

Meanwhile, the approval of the Fiscal Responsibility and Budget Management Bill also has been postponed as political scandals and attempts to apportion blame for financial irregularities take centre stage in parliament.

Moody's recognises that the current account deficit, measured against nominal GDP, appears very small, but warned that this is attributable to the relatively closed economy and provides no guarantee that the external finances are healthy.

On the other hand, the agency does acknowledge that the substantial foreign exchange reserves and quite low short-term government debt indicate a favourable liquidity position. Nevertheless, Moody's says that its decision to remove the positive outlook on the foreign currency country ceiling (assigned in October 1999) reflects its analysis that current and capital account inflows on the balance of payments will be insufficient to prevent a further rise in the country's external debt liabilities.

In the absence of significant foreign investment, non-resident Indian inflows (through private transfers and bank deposits) and commercial debt-creating capital are now the major source of balance of payments support, which cannot be relied upon to provide financing on an ongoing basis in all market conditions.

Although partly attributable to the reduction in global trade and generalised risk aversion regarding emerging markets, Moody's believes the reasons behind the slumping non-debt-creating capital inflows are also homegrown. Infrastructure shortages, the complex regulatory regime, and lapses in contract enforcement allowed by bureaucratic discretion-as illustrated by the imbroglio over the Dabhol Power Corporation-have dampened domestic and foreign investor confidence.

In summarising the rationale for its outlook changes, Moody's emphasises that its main concern is the credit risk represented by the growing domestic debt burden and the longer-term consequences of past profligacy, thereby warranting a negative outlook on rupee-denominated debt securities of the government.

In addition, the diminished prospects for structural improvements in the Indian economy pose risks for the health of the external finances, and therefore Moody's has determined that a positive stance on the foreign currency country ceiling is no longer appropriate.

As a consequence of the change in the outlook on the foreign currency country ceiling, the outlooks on the Ba2 foreign currency debt ratings of Industrial Development Bank of India and Power Finance Corporation are changed to stable from positive.

The outlooks on the Ba3/NP foreign currency deposit ratings of the following banks rated by Moody's also are changed to stable from positive:

• Bank of Baroda
• Bank of India
• Canara Bank Central Bank of India
• Oriental Bank of Commerce
• Punjab National Bank
• State Bank of India
• Union Bank of India

Moody's indicated that this action does not affect the Ba2 foreign currency debt rating of ICICI Limited, which remains on review for possible upgrade, in line with Moody's revised policy on foreign currency country ceilings.

The action also does not affect the Ba2 Issuer Rating of IFCI Limited, which remains on review for possible downgrade.

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