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Moody's 'disappointed' in India's fiscal effort

India's feeble budget cutting effort over the last year and the government's lack of credibility with foreign investors have left international credit ratings agencies unimpressed, with Moody's Investors Service adding its voice to the criticism on Friday.

Moody's said it has seen "slippage" in the government's reform effort but declined to say whether a ratings change can be expected. And Standard & Poor's said it was still worried about the size of the budget deficit.

A day earlier, competing rating agency Fitch lowered its ratings outlook on India's sovereign debt to negative from stable, citing worries about fiscal policy, privatisation and deterioration in the country's foreign investment climate.

Since June of 1998 Moody's has rated India Ba2, two notches below investment grade. In October of 1999, the agency placed a positive outlook on the rating reflecting optimism that the government would reform its budget and enact other reforms.

"There's been a lot of slippage since then," said Kristin Lindow, lead India analyst at Moody's.

"We do discuss whether the rating is appropriate given the risks we see and whether the positive outlook is still warranted. But as of this moment we have not decided to change that," she said.

Adding to India's problems is a dispute between Enron Corp and a local utility. The row was sparked late last year when the Maharashtra State Electricity Board, defaulted on payments of $48 million to Dabhol Power Company, 65 per cent owned by Houston-based Enron.

"The dispute indicates that India's government may not be willing to live up to its contractual obligations," Lindow said. "As a consequence, this would further deter foreign direct investment from coming into the country."

Since October of 1998, S&P has rated India's foreign currency debt at BB. The outlook has been stable since October of last year.

"Our rating is constrained by India's large fiscal deficit and large government debt," said Joydeep Mukherji, India analyst for S&P.

The combined deficit of the state and central governments amounts to about 10 per cent of gross domestic product, Mukherji noted. And India's combined government debt is approaching 70 per cent of gross domestic product, he said.

"Those are high numbers and that's why the rating is so low," Mukherji said.

Meanwhile, Investors are left to figure out for themselves what's in store for India, considering the positive outlook given by Moody's, Fitch's negative view and the stable outlook given by S&P.

Fitch currently rates India's foreign currency obligations at BB-plus, which is one notch above the ratings given to India by both Moody's and Standard & Poor's.

The rupee fell close to a lifetime low on Friday following the Fitch ratings announcement, but recovered to end little changed on the day. Indian stocks fell.

Analysts in India said the factors cited by Fitch were not new and had been discounted by markets.

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