Five big facts about S&P’s India outlook

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NDTV Correspondent, 25 Apr 2012 | 01:45 PM

Credit rating agency Standard & Poor has revised India’s economic outlook from stable to negative. It has cited slow progress on the fiscal front and deteriorating economic indicators for the downgrading. Agencies like S&P review the economic outlook for nations and, based on economic fundamentals, assign sovereign credit ratings that make borrowing expensive or cheap for a country. 

Here are five big facts on the latest India outlook:

1. Standard & Poor has revised India’s outlook to negative. This is not the same as the sovereign credit rating. The agency has reaffirmed sovereign credit rating at investment grade (BBB-) but suggested that the probability of a downgrade in the sovereign rating is now higher than before. S&P has revised the outlook to negative from stable. The outlook is a lead indicator for a credit rating. India currently enjoys a stable rating of BBB- on the sovereign debt. Borrowing is cheapest for ‘AAA’-rated countries like Germany. S&P hit the headlines earlier this year for downgrading the United States’ credit rating for the first time ever to below AAA.

 2. Indian stock markets fell on news of the negative outlook. The Sensex slipped nearly 200 points to 17,019 while the broader Nifty index slumped over 60 points to 5,160. A lower sovereign rating will make money dearer for Indian corporates, particularly in foreign currencies. State-run companies will be the hardest hit, since their finances are more directly linked to the government.

3. India’s risk factors included high inflation, a weak government fiscal position, and a slower rate of economic growth. “High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle--with the next elections to be held by May 2014--and the current political gridlock,” S&P said in its statement.

4. The agency sees little progress on economic reforms that could help control fiscal deficit. S&P is not confident about the government achieving control over fiscal deficit. The fiscal deficit – or the difference between the government receipts and spending – is expected to be 5.1 per cent of the gross domestic product or GDP for the year ended 2012-13. S&P does not think these targets could be achieved.

5. Finance minister Pranab Mukherjee was quick to react and say that the government would achieve budget targets. India is likely to pass some financial reforms in the current session of Parliament, which started on Monday, he added. "There is no need for panic," Mukherjee told reporters. "The situation may be difficult, but we will be surely able to overcome (it)."