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Do recent developments significantly reduce the chances of the rating agencies cutting India to sub-investment grade?
In October 2012, Standard & Poor’s, a credit rating agency, threatened to downgrade India’s debt status to ‘junk’ grade if reforms were slow in the coming months. India’s Finance Minister, P Chidambaram, in an attempt to upgrade the rating of the Indian economy, has come up with polices to enhance investments in the country, to reduce the import of gold and to cut government subsidies on fertilisers and diesel.
This is how credit rating agencies have managed to put pressure on the government to curb spending and attract more foreign investors to set up manufacturing plants and multi-national companies in India. By doing so, India will be killing two birds, namely the rising unemployment rate and low economic growth rate, with one stone, foreign direct investments (FDIs).
According to credit rating agencies, the Indian government should reduce fiscal deficit because it leads to excess demand, which ultimately worsens the current account deficit. This will result in the scarcity of foreign exchange, making it difficult for the Indian government to service foreign borrowings.
This will eventually downgrade India’s credit rating. So, to ensure that rating agencies do not cut India to sub-investment grade, the government has resolved to tread the path of imprudence and reduce the fiscal deposit to 3 percent by 2017. In the short term, the government has come up with plans and strategies to bring down the fiscal deficit from 5.2 percent to 4.8 percent by 2014.
One of the strategies undertaken by the government to bring down the fiscal deficit is by attracting FDIs in the multi-brand retail sector. In addition, the government will be raising the cap on foreign investments on other sectors so that it can gain revenue from outside of the country, instead of raising taxes and putting pressure on the citizens.
After the Union Budget was presented by P Chidambaram, both Standard & Poor’s and Fitch made an announcement that India’s sovereign rating has been unaffected. However, they also mentioned that the credit rating may change depending on how the government executes the policies as per the Union Budget and controls the subsidies to the poor and the unprivileged classes of the society.
The current rating by Standard & Poor’s for India is ‘BBB-’, which is the lowest in the investment grade and it portrays a negative outlook. However, the current developments in economic policies are reducing the import of gold and increasing the level of investments in the country. With this, the value of exports will be greater than the value of imports and the current account deficit gap will reduce. This will ultimately enhance the credit rating of India.
The Cabinet Committee of Investment has given approval for infrastructure development projects worth Rs 70,000 crore. This will boost the growth of cement and steel industries in India. With more investments from foreign investors, there will be sufficient funds for the development of Delhi-Mumbai, Bangalore-Chennai and Bangalore-Mumbai industrial corridors.
The recent developments in India, as reflected in the policies implemented by the government and the Union Budget, reduce the chances of rating agencies cutting India to sub-investment grade. Standard & Poor’s is scheduled to visit India on April 25, and given the progress India has made over the last few months on the economic growth, we can only expect positive feedback from the rating agency.