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Rating firms may be judging India harshly

Analysts have reacted with surprise to last week's decision of ratings agency Fitch to cut India's sovereign ratings outlook to negative from stable, and say there are no grounds to downgrade the country.

Fitch, which rates India's foreign currency obligations at BB-plus, a notch above Moody's Investors Service and Standard & Poor's, cited concerns about fiscal policy, privatisation and deterioration in foreign investment climate.

However, economists speculated it could either be on account of Fitch adjusting its ratings in line with other global agencies, or a fallout of US energy giant Enron Corp's threat to exit an Indian power venture over payments problems.

Moody's and S&P said on Friday they have not revised ratings or outlook but are disappointed with fiscal reform efforts.

Local currency and stock markets reacted nervously to the announcement, but economists said most concerns were exaggerated.

"When the direction of reforms is positive and government flows are improving, the outlook should not change," said Mohan Nagarajan, chief economist at local rating agency CARE Ltd.

Even if the provocation for the rating review was the Enron episode, analysts said the problems were specific to the power sector and will not affect the robust foreign investment the country has been receiving.

"Enron was a bad deal, made on unreasonable terms in the first place and does not reflect the ability of the government to pay its dues," said an economist with a US-based fund.

Some of the confusion arises from the various ratings assigned to India.

Moody's has retained a positive outlook on its Ba2 rating since late 1999, while S&P has a stable outlook and a BB rating.

Concerns overstated

Analysts said none of the factors Fitch cited had deteriorated in the past year, since it first rated India.

Fitch said India's fiscal-monetary mix was unfavorable, real interest rates were high and there was the risk of a debt trap.

India marginally overshot its budgeted fiscal deficit in 2000-01 (April-March) to 5.2 per cent of GDP, down from the previous year's 5.6 per cent.

But laws to control government spending are awaiting parliament's approval, there are incentives for disciplined state governments and a determined effort at privatising state-run firms has begun.

Burgeoning fiscal deficits have persisted for a decade and public debt at 60 per cent of GDP is high, but at 6 per cent annual growth, India is one of the fastest expanding economies in Asia.

"In terms of external liquidity, India is much stronger than its BB+ rating while even its public debt to GDP ratio is lower than that of some Asian nations," said P K Basu, chief economist for South East Asia at Credit Suisse First Boston, Singapore.

Foreign investment has been pouring in -- portfolio flows at $2.2 billion so far in 2001 are at record levels and compare with $1.56 billion for the whole of 2000 -- and foreign exchange reserves are strong at $42.8 billion.

Interest rates and yields have also dropped, with the Reserve Bank of India adopting an aggressive easing stance this year to prop the slowing economy, and inflation is benign.

"The hardest initial steps are being taken and there is still a lot of inertia, but soon there will be a willing audience and reforms can progress faster," CARE's Nagarajan said.

But critics said the changes were still very superficial and structural reforms that would spur long-term growth and demand were lacking.

"What the rating agencies have emphasised is fiscal consolidation, which means better revenue streams, efficient expenses, user charges for public utilities...we promised these three years back and haven't moved very far on those," said Saumitra Chaudhari, economist with local rating agency ICRA Ltd.

"We still do not have a securities bill, mature debt market and our banks have not cleaned up."

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