| NEW DELHI, April 26
NEW DELHI, April 26 S&P credit analyst Takahira
Ogawa listened politely as officials at India's finance ministry
made an hour-long pitch for a ratings upgrade, citing economic
growth prospects, revenues and their efforts to contain the
government's fiscal deficit.
At the meeting two weeks ago, officials argued that tax
returns were rising and debt levels were on the decline compared
to gross domestic product, two officials who were at the meeting
Singapore-based Ogawa gave no sign of what he was thinking -
and could not immediately be reached for his version of events -
but evidently he left unconvinced.
On Wednesday, the ratings agency cut its outlook on India's
BBB- rating to negative from stable and warned it had a
one-in-three chance of losing investment-grade status, sending
shockwaves through the ministry. Its decision could raise costs
for Indian borrowers and undermine foreign investor confidence
in Asia's third-largest economy.
"We were not expecting this downgrade," one senior adviser
at the ministry said.
The misplaced optimism before the cut suggest the finance
ministry may be out of touch with opinion among private
economists, investors and even the central bank about the
faltering economy. But it also reflects the view in New Delhi
that India is unfairly saddled with a low sovereign rating.
In February, the finance ministry's chief economic adviser
Kaushik Basu complained that India's fast growth was not
reflected in global agencies' ratings. "In relative terms, India
has become a better investment destination," Basu said.
As the news broke, top finance ministry officials huddled in
their offices, eyes glued to monitors and television screens for
signs of an investor exodus from the markets.
"The initial reaction was all of us turned on our TV sets to
see what is happening in the stock market," the senior adviser
at the ministry said. Shares dropped more than 1 percent in the
immediate aftermath but recovered to close down 0.33 percent.
Finance Minister Pranab Mukherjee's first public comment on
the cut - "don't panic" - seemed aimed as much at his own
ministry as at the general public.
While the shock news was a wake-up call, officials say the
best they can do for now is take incremental steps aimed at
restoring confidence in the India story.
India has lost some of its shine recently. After growing at
an enviable average rate of more than 8 percent annually for the
previous five years, it expanded less than 7 percent in the last
fiscal year, its slowest pace in three years.
The same 2011/12 fiscal year, which ended March 30, saw its
current account and fiscal deficits blow out way beyond targets
because of a growing bill for subsidies, mainly of fuel, and
soaring oil and gold imports.
"If we are able to keep our budget targets on track, it
would improve our credibility in the market, and may encourage
the rating agency to reconsider its decision," said a finance
ministry official, who declined to be identified because he was
not authorised to speak to the media.
The S&P cut added force to an avalanche of criticism about
the government's economic management. Earlier this month, Prime
Minister Manmohan Singh sat silently as a panel of his peers,
including the central bank governor, told him lack of progress
on economic reform had left the economy in disturbing shape.
"The broader message for everyone in the government is that
we need to move a little faster and a little quicker," said
Dipak Dasgupta, the finance ministry's top economist.
"We might hurry along a little bit given that everyone seems
to think that we need to hurry. Fine, so we will do it."
WE'RE NOT TUNISIA
S&P ratings for India are the lowest for any of the
so-called BRICS - Brazil, Russia, India, China and South Africa
- grouping of emerging economies that are reshaping global
Indeed, some analysts speculate that India is at risk of
being replaced in the BRICS ranks by Indonesia, whose credit
ratings were recently upgraded to investment-grade. S&P's
warning effectively says India's rating is at risk of slipping
Policymakers in India see their country as a
superpower-in-the-making after 20 years of fast growth and it
clearly rankles with some officials that S&P considers the
economy as risky as those of some Central Asian and North
"We made the presentation arguing India's growth prospects,
tax-GDP ratio, efforts to fix the fiscal deficit, are quite
genuine and deserve better ratings than countries like Tunisia,"
said an official who was involved in the presentation to S&P.
Dasgupta, who recently travelled to Tunisia, also said it
was unfair to club India together with an economy in tatters
after last year's revolution.
The officials reminded Ogawa that India was still growing
faster than any other major economy apart from China.
But sceptics say India is politically unable to take major
steps to rein in ballooning subsidies, now more than 2 percent
of GDP. Private economists also say the government will struggle
to rein in its current account and fiscal deficits and revive
GDP growth while world energy prices are high, and with a period
of election spending looming.
PRAY FOR RAIN
Everyone from the finance minister to the central bank
governor agree the most urgent step is to cut subsidies on fuel,
especially diesel, which some officials say will happen in May.
But the move is unpopular with the opposition and the
government's coalition partners and has long been delayed.
Officials said India plans to take incremental steps to
support projected growth and trim its fiscal deficit to 5.1
percent in the current year while - as one minister put it -
"praying for good rainfalls and stable crude oil prices".
One measure likely to take effect soon is a duty on gold
imports, likely to be passed in parliament in May and projected
to cut gold imports to 1.7 percent of GDP from 2 percent last
year. India imported gold and silver worth $60 billion in
2011/12, pushing up the trade deficit to near $185 billion.
Officials also tout recent moves to lift exports of sugar,
grains and cotton to boost farm growth and foreign exchange, and
point to a jump in approvals for infrastructure projects as the
prime minister focuses on supply bottlenecks.
But hurt by corruption scandals and held back by rebellious
coalition partners, it is far from clear that Singh will be able
to deliver enough reform to improve perceptions.
"The real issue in India is not that the problems are
unknown or that the solutions are unclear; it is that solutions
are not being implemented," said Rajeev Malik, a senior analyst
at CLSA Singapore. "That is unlikely to change substantially."