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Corporate India’s foreign loans may turn costly

business Updated: May 28, 2007 00:26 IST
Corporate India’s foreign loans may turn costly

The overseas borrowing costs of Indian companies could rise over the next two years if the government fails to meet its deficit reduction targets as this will adversely impact the sovereign credit rating of the country, analysts say.

If the rating worsens, there will be fewer takers in overseas markets for Indian bonds and international lenders will charge more from Indian firms looking to raise money. The rating models used by international lenders factor in sovereign ratings, and a drop in the ratings would have an impact (on the rating of Indian companies and the interest rate they would have to pay), said Pankaj Karna, partner and head, M&A and lead advisory, Grant Thornton India, an audit firm.

India’s Fiscal Responsibility and Budget Management (FRBM) Act, 2003, aims to shrink revenue deficit, the difference between the government’s revenue receipts and revenue (or operational) expenditure, to zero by March 31, 2009. In the financial year leading to the deadline, 2008-09, India and the government will likely be in election mode — the current government assumed office in 2004 for a five-year term. Economists do not expect the government to be in a position to control expenditure in an election year.

Finance minister P. Chidambaram has said he expects revenue deficit to be 1.5 per cent of GDP at the end of the current financial year (2007-08), a reduction of 50 basis points compared with the last financial year (2006-07). If the government has to meet the targets set by the FRBM Act, it would have to reduce its revenue deficit by a further 150 basis points — in his Budget speech in February, Chidambaram had said the government was on course to achieve this.

Meeting this target had a bigger impact on India’s sovereign rating than is usually understood, said a retired Finance Ministry official who did not wish to be identified. It was seen as a sign that the entire political spectrum was in favour of fiscal prudence and any deviation would affect India’s credibility, the official added. Some analysts, however, do not see cause for alarm. “I don’t see a major danger at this point,” said DK Joshi, principal economist at rating agency Crisil, on the possibility of the government falling short of its target.

So far, the government’s attempt to squeeze revenue deficit has succeeded primarily on account of the sharp growth in tax revenue. “Maintaining momentum of revenue is critical for meeting FRBM targets,” added Joshi. Revenue growth has been spurred by an economy that grew by 9.2 per cent and 9 per cent over the previous two years.

Forecasts estimate that India’s GDP will grow by over 8 per cent in 2007-08 and 2008-09; Crisil’s own projection says the economy would expand at between 7.9 per cent and 8.4 per cent this year and 8.2 per cent next year.

Over the past few years, the combination of strong economic growth, introduction of the FRBM Act, and better government finances have encouraged international credit rating agencies to push India’s sovereign rating into investment grade. Standard & Poor’s Rating Services raised India’s rating to investment grade in January after a gap of 15 years, while Fitch did so earlier, in August 2006. Moody’s raised India’s foreign exchange borrowings to investment grade in January 2004.