Govt keeps its cool as downgrade worries loom

Global credit rating firms, banks and research agencies have raised fresh question marks over India’s economy, hit by high government borrowings, rising imports and political compulsions. HT reports. The D syndrome

Global credit rating firms, banks and research agencies have raised fresh question marks over India’s economy, hit by high government borrowings, rising imports and political compulsions, increasing risks of a possible downgrade of the country’s sovereign bonds.

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Rating agency Standard and Poor’s (S&P), which has maintained India’s sovereign rating at BBB-, had warned that the country faces at least a one-in-three chance of its ratings being downgraded in the next two years.

The "BBB-" is one notch above "junk," which carries a higher risk of default. A downgrade means that the government would have to pay higher interest rates on public borrowings.

Moody’s Analytics, in an August 8-report, lowered India’s growth forecast for 2012 to 5.5% and said “instability created by a government that has badly lost its way,” was halting India’s economic growth.

The government on Friday hit back, saying domestic priorities would determine India’s growth.

“India’s policy priorities will not be determined by the opinion of rating agencies. Our policies depend on our domestic priorities,” Dipak Dasgupta, principal economic advisor, ministry of finance, told HT.

India’s factory output contracted by (-)1.8% in June, the third fall in four months, data released on Thursday showed, even as finance minister P Chidambaram promised action to halt an embarassing slowdown in the economy, which, until recently, was an engine of global growth.

Economic growth slowed to 5.3% in the last quarter of 2011-12, the slowest since 2003-04, amid concerns expressed by experts that managing a restive alliance has consumed more time rather that prudent policy making.

Analysts said that controlling fiscal deficit, a measure of public borrowing, will be a big challenge for the government.

“We believe slower indirect tax collection growth combined with continued high growth in government spending will push the fiscal deficit higher than the budget estimate (of 5.1% of GDP),” said Chetan Ahya of Morgan Stanley in a recent research report.