India Ratings Face Pressure on Widening Deficit, Moody’s Says
India’s credit rating may come under pressure if Prime Minister Manmohan Singh’s government is not able to rein in a widening budget deficit, Moody’s Investors Service said.
“The stable outlook on the ratings has recently faced growing pressure, mainly due to substantial deterioration in the fiscal position,” Aninda Mitra, a senior analyst at Moody’s in Singapore, said in a report today. “Inability of the newly re- elected government to meaningfully adjust fiscal policies and push ahead with reforms could pressurize the foreign currency credit rating.”
Moody’s Baa2 rating on India’s long-term foreign debt is the second-lowest investment grade. The ranking is the highest in South Asia after Kazakhstan’s, four levels below China’s, two levels under Malaysia’s and six levels above Pakistan’s.
Prime Minister Manmohan Singh’s government, which won a second five-year term this month, is borrowing more to fund three stimulus packages to revive growth in Asia’s third-largest economy, forecast by the central bank to expand at the slowest pace in seven years. Higher borrowing widened the budget deficit to 6 percent of gross domestic product in the year to March 31.
“If the newly re-elected government proves able to quickly outline and sustain a credible program for reducing consolidated deficits, then the sustainability prospects for general government debt would improve,” Moody’s said in its report. “These trends could boost the outlook for the country’s local currency credit ratings.”
Record Borrowings
India plans to borrow a record 3.62 trillion rupees ($76 billion) in the current fiscal year that started April 1 and estimates the budget shortfall at 5.5 percent of GDP bad credit payday advance.
Sustaining economic growth is a “higher priority at this moment” over sovereign ratings, India’s Finance Secretary Ashok Chawla told reporters in New Delhi yesterday. India has asked the rating agencies to explain the rationale behind their recent warnings on ratings, he said.
India’s Finance Minister Pranab Mukherjee yesterday said the government will continue to step up spending this year to support growth, risking a wider budget deficit.
“Let me say unambiguously that we are committed to restoring growth and employment and that would not have been possible without increased spending funded by incremental borrowing,” Mukherjee said. “This would need to be further continued in the current year.”
Widening Deficit
The comments from Moody’s today came after Fitch Ratings, which ranks India’s debt BBB-, on May 14 said it expected the new government to step up spending to arrest slowing growth. That would widen India’s national budget deficit, including state government finances, to more than 10 percent of GDP for a second year in a row, Fitch said.
Singh’s government has unveiled three stimulus packages since December, including lowering retail fuel prices, cutting taxes on consumer products and injecting capital into state-run banks, to shield the economy from the global crisis.
The $1.2 trillion economy may grow by between 6.5 percent and 7 percent in the current fiscal year that started April 1, the slowest pace of expansion since 2003, Chawla said yesterday. The central bank expects economic growth in the current fiscal year at 6 percent.