More gloom for economy after rating downgrade

Friday, 20 September 2002, 07:00 Hrs
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NEW DELHI: Left nearly crippled by political squabbling within the ruling coalition and slow pace of reforms process, India's economy is likely to face tougher times ahead after a cut in the country's credit rating.

Analysts say the rating downgrade for India announced by global rating major Standard and Poor's will deter foreign investors, already put off by a spate of political and economic troubles, from putting their money in the country.

"The downgrade will definitely have a negative impact on the economy," said D.K. Srivastava, a senior economist with New Delhi-based think tank National Institute of Public Finance and Policy (NIPFP).

"Given that recovery is already sluggish, external investors will be reluctant to commit investment in India in the short to medium term as a result of the rating downgrade," Srivastava said.

Standard and Poor's Thursday cut India's local currency long-term rating by one level to BB+ from BBB-, citing the country's rising debt burden and slow pace of economic reforms process.

The cut may raise borrowing costs for domestic companies, affecting investment in an economy that relies heavily on foreign funds. With the latest downgrade, India has been grouped together with countries such as Costa Rica and Guatemala.

"The local currency downgrade reflects the government's growing rupee debt burden and its inability to stanch the financial weakening of the public sector," said John Chambers, managing director of Standard and Poor's.

"India's government, a coalition of two-dozen political parties, has been unable to contain its growing budget deficit, expected to reach six percent of the GDP (gross domestic product) in the current fiscal.

"As a result, the consolidated debt of the central and state governments is estimated to exceed 80 percent of the GDP this year," he added.

According to Standard and Poor's, the inability of the country's leadership, cutting across all political parties, to implement announced reform policies in a timely manner, contributes to India's falling creditworthiness.

The rating downgrade comes close on the heels of the government deferring the sale of its stake in two state-run oil giants on clash of political interest within the multi-party ruling coalition.

After the deferment of the proposal to sell the oil giants by three months, the government is now facing increased opposition from its allies on moves to privatise other major units, triggering a massive sell-off in the stock markets.

Many say the failure to implement the privatisation programme reflects Prime Minister Atal Bihari Vajpayee's failure to force the multi-party National Democratic Alliance in power to push through change.

New Delhi plans to raise 120 billion from sales of shares in state-run firms in the current financial year. It has repeatedly failed to meet targets in the past because of stiff protests from opposition parties and trade unions.

"The main reason behind the downgrading is the fact that despite many big announcements by the government the reforms process has not been expedited," said economist D.H. Panandiker.

"The privatisation of public sector units was the only reform process that was gaining momentum in the last one year and had raised expectations of investors.

"But now the process has completely been taken over by politics. It is almost certain that the programme will be very much delayed and I won't be surprised if it is completely stopped," Panandiker said.

"The government had made a lot of promises on fiscal reforms front. But it has not yielded any result. Neither the central government nor the state government have shown clear improvement in fiscal structure.

"This has been the main concern of the foreign investors and the rating downgrade only gives confirms the fears. The rate cut is a timely reminder for the government to take some tough measures to improve public finance."

In January, another global rating agency, Moody's, had said India's ratings outlook was clouded by the lack of progress on fiscal reforms front. It, however, did not downgrade the country's rating.

Indian share market reacted nervously to Standard & Poor's local debt ratings downgrade to junk bond levels in early trade Friday.

In the afternoon trade, blue-chip equities pulled off sharp lows with the market barometer Bombay Stock Exchange sensitive index down 0.79 percent at 3,016.38 points, after sliding as much as 1.53 percent.

Source: IANS
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