Fiscal deficit may drive down India rating, says S&P

 “India’s high fiscal deficits are not sustainable in the medium term and if fiscal consolidation is delayed, there is a risk that the sovereign credit ratings on India (BBB-/Negative/A-3) may be lowered,” S&P said in a release.

S&P had cut its outlook on India’s long-run sovereign ratings from stable to negative on concerns of high fiscal deficit, which means that ratings are vulnerable to downgrade.
At present, the agency has assigned BBB negative ratings to India. If India achieves fiscal consolidation in the next two to three years, the sovereign ratings on India could be maintained at’BBB-’ and the outlook revised to stable, S&P said.

Within expectations

It further said although the projected government budget deficit of 6.8 per cent of GDP for 2009-10 was high, almost the double of 2.7 per cent recorded in 2007-08, it was within its expectations. “Including state government deficits and off-balance-sheet items such as oil and fertilizer bonds, the deficit is estimated to reach about 12 per cent of GDP in fiscal 2009-2010,” S&P said.

The rating agency revised the outlook on India to negative on February 24, 2009, on expectations of increasing fiscal deficits.

“We continue to believe that such high levels of government deficits are unsustainable in the medium term, although we were not surprised by the number itself,” it said.

S&P would wait for the 13th Finance Commission report, which must be submitted to the Finance Minister by the end of October 2009, to garner a broader picture on the fiscal consolidation in the medium term.

The hefty fiscal deficits and debts outstanding are two of the most significant negative factors on the sovereign credit ratings on India, it said.

Further, the other important rating factors for India include its medium-term growth prospects, inflation rate and interest rates, progress in structural reforms; and net inflow of funds.