MUMBAI, Sept 21: Indian business hit out on Friday at Standard and Poor’s (S and P) for its decision to downgrade the local currency rating to junk status and strip the country of its investment grade.
The global ratings agency cited a setback in privatisation reforms, rising debt and a weakening public sector as reasons for the downgrade.
It also warned the slow pace of economic reforms made India a case for further downgrades.
This is ridiculous, said Confederation of Indian Industry chief economist Omkar Goswami.
China apart, no other country has over 62 billion dollars in forex reserves, he said (India) has never reneged on debt repayment and has achieved 5.85 per cent average growth in the last 12 years.
Tarun Das, director general of CII, added there was no justification in S and P grouping India with weak economies like Peru, Costa Rica and Guatemala.
Analysts, meanwhile, were optimistic the poor ratings would not impact on the economy as India had sufficient forex reserves.
While there is a warning signal given by S and P through its downgrades, its immediate negative implications are limited, said Vasudev Joshi, head of research of British-based banking giant HSBC.
The downgrade is for the local rupee debt and not for the oversees debt. All this can be countered by India’s healthy forex reserves. The entire forex balance is 100 percent more than all the rupees that are in circulation in India, he added.
Traders on the Bombay Stock Exchange turned aggressive sellers in response, dealers said, sending the 30-share index 47 points lower to 2,993.78 in early trade. The index later recovered to 3,014.06.
S and P said it also put a “negative outlook” on India’s long term ratings of both local as well as foreign currencies.
Continued fiscal deficits along with languid pace of economic reforms would lead to further downgrades, it said in a statement released in New York.
The long term local currency rating was downgraded to BB-plus from BBB-minus, while the short term local currency rating was cut to B from A-3.
The ratings agency has however affirmed the BB rating for the long term and the B rating for the short term foreign currency sovereign credit.
It said the new ratings reflect major ongoing uncertainties and rising risks to business, financial or economic conditions which may lead to inadequate capacity to meet long term financial commitments.
S and P managing director John Chambers said the inability of the country’s leadership to implement announced reform policies in a timely manner had contributed to India’s falling creditworthiness.
For example, recent political disagreements threaten to set back India’s privatization programme, which has enjoyed success in recent months, Chambers said in the statement.
The resulting loss in the government’s credibility, along with the foregone revenue from the sale of large public sector firms, weaken investor confidence and enlarge the government borrowing needs.
India’s Prime Minister Atal Behari Vajpayee on September 7, postponed the much awaited privatization of fuel companies Hindustan Petroleum and Bharat Petroleum after differences within the ruling BJP party members.
As a result the consolidated debt of the central and the state governments is estimated to exceed 80 per cent of the GDP this year, Chambers added.—AFP