On Lowering India's Credit Rating

   
The credit outlook of India has been lowered to Negative by the Standard & Poors yesterday. It was not done on any fresh issues. There were problems for India to carry forward economic reforms despite the fact that India’s Prime Minister is one of the outstanding economists in the world and he knows better than anyone else that reform measures have to be taken up urgently. 

Ever since the failure to allow foreign investment in retail sector the investors and rating agencies were watching India as to whether India stages a come-back in the overdue reforms program. It is not easy for the Prime Minister to make it when disparate political parties think differently on his proposals. In fact the P M is the most impatient person to reach on reforms regime as quickly as possible.

The Finance Minister Mr.Pranab Mukherjee said that there was no need of being panicky and that though the situation is difficult it can be overcome. The S&P had figured out their decision on rating early this month itself and they were in contact with the Finance Ministry when they explained their estimate on growth prospects, revenue generation and efforts to contain fiscal deficit. The fiscal deficit is what the S&P officials most concerned about and what prompted them to make this drastic step. The rating agency has also warned that it will down grade further if the growth prospects continued to be dim in 6 months.

India’s sovereign credit rating is BBB- now and that is the lowest rung as far as investment choice is concerned. In other words the S&P tell the foreign investors that the credit rating is lowest and be careful when doing business.  The credit rating will affect all institutions in India including companies and banks irrespective of their individual rating meaning that they all have the same rating that of India. The investors can demand higher interest on their investment on bonds or loans  pointing out the lower rating which makes the borrowing  a little more expensive for both the Government and the Indian companies.  As India is not engaged in issuing global bonds to raise money the present cut in rating might not affect the Government fiscally but the Indian companies would be exposed to higher interest rates for foreign loans.

Another rating agency Moody’s has not cut the rating yet. However they pointed out their concern on the state of economy.The Moody’s did not cut rating is of little solace as investors would choose the worst rating to form base of their strategy.

It is a wake up call for India.



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