Govt. was hoping for an upgrade in status
By R Chandrasekaran
CHENNAI: The two prominent rating agencies, Standard & Poor’s and Moody’s, have made it clear there will not be any changes in rating on India, though the country might have to take some initiatives to improve the climate for investments.
While India has been clamoring for an upgrade from the rating agencies, the comments from them is a setback. As part of initiatives to impress upon the rating agencies on the seriousness of the government’s commitment towards reforms, its Economic Affairs Secretary Arvind Mayaram had met the representatives of S&P on April 25. The government had also held a similar exercise with Fitch on April 12.
During an interaction with a television channel and a national daily on the sidelines of the Asian Development Bank’s annual conference in Noida, top officials from both S&P and Moody have agreed that the reforms announced by the Indian government since September is positive.
There cannot be any doubt that the government has taken some bold initiatives such as capping LPG cylinders to nine per household and allowed oil companies to increase diesel price in small proportion every month. This apart, foreign direct investment was cleared in the retail sector and foreign investors were allowed to invest in domestic carriers risking their vote bank. The government also cleared IKEA’s single brand retail shop proposal to be set up in India recently. The Reserve
Bank of India has also slashed interest rates by 75 basis points in 2013 alone.
However, the two rating agencies believe that these are modest measures and will have little impact in the near term in view of the limitations the Indian economy is facing, especially with regard to policy. They also feel that there are other areas such as weak infrastructure, fiscal deficit, high food inflation, and current account deficit where the government’s policy could continue to face structural obstructions.
Following the budget presentation on February 28, both S&P and Fitch gave enough indication of a warning that subsidies and policy execution hold key to the success of the budget proposals and had disclosed that there was no rating change.
During the meeting with S&P representatives, the economic affairs secretary has narrated the government’s resolve to control fiscal as well as current account deficits besides speeding up mega projects. He has pointed out to them that the Cabinet Committee on Infrastructure has cleared billions of dollars worth of projects during the recent past.
The economic affairs secretary also explained to the S&P during their last meeting that while India is phasing out subsidies on petroleum products, developed nations are offering subsidies of up to 36 percent.
Therefore, the current comments from the rating agencies are a serious setback for the government. S&P Managing Director (Sovereign & International public finance ratings – Asia Pacific) Elena told a television channel, “…a rating upgrade at this point is not on the cards”. She added, “If you think the rating is on negative outlook, it is highly improbable that an upgrade follows from a negative outlook. Usually, the outcome from a negative outlook is downgrade or stable outlook”.
Similarly, Moody’s vice president for sovereign risk group Atsi Sheth told The Times of India, “We know elections are always a break in the policy process in any country it is not specific to India. So, that is not something that necessarily sort of constraints India’s credit profile. It is not elections but the political process in India”.
The comments from the two rating agencies are not surprising considering that the RBI Governor Dr. D. Subbarao too expressed more or less similar opinions when he announced repo rate cut on Friday last after an annual monetary policy review meeting. It is quite clear from the domestic as well as from international experts that the government needs to do much more than what it had done so far to not only revive the economy at an accelerated pace, but also gets the rating upgraded.
To contact the author, e-mail: rchandrasekaran@americanbazaaronline.com