High inflation, weak fiscal weaken India rating: S&P

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High inflation, a weak government fiscal position and slower economic growth will negatively impact India’s sovereign rating, rating agency Standard and Poor’s said on Monday.

Many developing countries, including India, have managed to maintain relative stability and continued growth despite sovereign debt concerns and weak economic performance in Europe and the US. But, these nations do face challenges of their own.

S&P’s unwelcomed rating for India is “BBB-/Stable/A-3” Ratings Services said the balance of risk factors (for India’s sovereign rating) may be shifting slightly toward the negative.

S&P’s credit analyst Takahira Ogawa said India had been grappling with a political gridlock. The government’s ability to implement measures to improve economic growth and fiscal prudence would be vital to boosting confidence.

“Our stable outlook on the ‘BBB’ long-term rating on India currently reflects our expectation of strong economic growth in the medium term and gradually improving fiscal performances,” he added. The agency has factored in inflation and political uncertainty, which may lead to higher government subsidies and stalled reform efforts.

Standard & Poor’s does not expect to downgrade or revise the outlook on the long-term rating in the near future. However, the negative factors, combined with the government’s weak policy formulation and implementation, may lead us to a tipping point, Ogawa said.

Referring to political scenario, the agency said the worst of India’s political gridlock might be over. But, the ways and the extent to which the government can implement steps to improve economic growth and fiscal prudence will be vital to boost confidence in India. In December last year, the government suspended a Cabinet decision, only two weeks after the initial announcement, to allow foreign investors 51 per cent ownership in Indian retail businesses after protests from various groups.

Despite this setback, Prime Minister Manmohan Singh said he intended to raise the issue again after a series of key local elections between January 30 and March 3, 2012.

India’s inflation appears to be showing some sign of moderation. The worst of this cycle might be over, as the increase in the wholesale price index for December 2011 dropped to 7.5 per cent.

Non-food credit growth also slowed to 15.7 per cent year-on-year in December 2011 - the lowest that year.

Then, with easing inflation and indicators showing slower economic activities, RBI lowered the cash reserve ratio for banks - by 50 basis points to 5.5 per cent on January 24 this year. The move aimed to free up some liquidity.

Managing the tricky balance between India’s sticky inflation and weakening growth is a significant policy challenge that may lead to mistakes, resulting in a hard landing or runaway inflation, S&P added.