S&P Cuts India’s Outlook

Investment-grade rating could be in danger

India could be in danger of losing its investment-grade credit rating, after Standard & Poor’s cut its outlook to negative from stable.

Bloomberg reported Wednesday that the ratings agency cited slowing economic growth and an increasing current-account deficit as reasons for its action regarding the country’s BBB rating. That is the lowest investment grade S&P provides.

In a statement, S&P said, “We are revising the outlook on the long-term ratings on India to negative to reflect at least a one-in-three likelihood of a downgrade.” The agency did, however, reaffirm the current BBB rating for the present.

Dangers to the Indian economy, said S&P, could come from diminishing trade performance, a fall in prospects for growth, or a delay in implementing fiscal reforms. India, among the largest emerging-market economies, sports the largest budget deficit. In addition, the gap in its current accounts hit an all-time high of $19.6 billion in the fourth quarter of 2011.

The agency also said it “expects the government to face headwind in implementing policy measures to improve its fiscal and macroeconomic parameters in the near future, given the current unfavorable political environment.”

Rajeev Malik, senior economist at CLSA Asia-Pacific Markets in Singapore, was quoted saying, “It’s a negative move and further solidifies the macroeconomic risks India is facing. Coming from the most conservative of the rating agencies, it’s a wake-up call for the government to do something meaningful soon.”

Economic growth in India slowed in Q4 to its slowest pace in nearly three years. Consumers backed off spending because of more expensive credit, and investment also suffered.

Finance Minister Pranab Mukherjee has proposed a cap on subsidies and has also increased service and excise taxes in a move to quell the country’s deficit, which in the year ended March 31 totaled 5.9% of GDP.

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