S&P downgrades India on fiscal fears

With the government’s fiscal position shaken by lower tax collections and growth prospects, leading global credit rater Standard & Poor’s has revised the outlook on the long-term sovereign credit rating on India to negative from stable.

With the government’s fiscal position shaken by lower tax collections and growth prospects, leading global credit rater Standard & Poor’s has revised the outlook on the long-term sovereign credit rating on India to negative from stable.

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However, it has affirmed its ‘BBB-‘ long-term and ‘A-3’ short-term sovereign credit ratings on India. The outlook shows a change in mood or direction, but not a change in rating.

“The outlook revision reflects our view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term. We expect general government deficit, including off-budget measures such as oil and fertiliser bonds, to increase to 11.4% in the fiscal year ending March 31, 2009, from 5.7% in the previous fiscal,” S&P said in a statement from Singapore.

Takahira Ogawa, S&P’s credit analyst, said the outlook was based on government policies ahead of elections that stress the fiscal position and particularly mentioned the debt relief offered to farmers and the salary revision for government employees under the recommendations of the Sixth Pay Commission.

“We expect the deficit to remain high at 11.1% in fiscal 2009-2010. The fiscal deficit could widen if the next government implements another stimulus package,” Ogawa said.

Although India’s medium-term growth prospects are strong, fiscal consolidation could be delayed because of the uncertain near-term economic conditions, he added.

S&P also noted that inefficient public sector companies carry out unviable operations in electricity, oil marketing, fertiliser production and food which are in effect helped by government finances.