India’s high debt burden prevents score improvement – ECR analysts


Matthew Turner
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As the country enters a crucial election cycle, fears arise about the government's ability to stay on course with its all-important fiscal consolidation.

Fears are growing about the Indian government’s ability to manage its debt burden, as the national election is likely to stall the reform agenda, according to economists participating in Euromoney’s Country Risk Survey.

Reform implementation could prove tricky if the government veers off its all-important fiscal consolidation track to salvage the party’s position at the top of the election polls.

Analysts’ fears that a stalled reform agenda could tarnish the country’s investment allure and lead to a widening in the country’s government deficit.

“Given the political cycle – with the next elections to be held by May 2014 – and the current political gridlock, we expect only modest progress in fiscal and public sector reforms,” reports Standard and Poor’s (S&P).

“Such reforms include reducing fuel and fertilizer subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership in various sectors such as banking, insurance and retail.”

However, finance minister Palaniappan Chidambaram is intent on maintaining the country’s fiscal deficit-reduction targets to 5.3% of GDP in the fiscal year to March. In a bid to reduce the country’s deficit, the government has embarked on a set of privatization bids, raising $2.13 billion with the sale on Thursday of a stake in electric utilities company NTPC, according to the FT.

The reforms are in part an attempt to tackle the rising current-account deficit, which reached 7.1% of GDP (c.f. 6.7% of GDP) in the previous year. In addition, a declining rupee, rising inflation – expected to average 7.0% to 7.5% in 2012/13, according to ICRA – and a moderation in economic growth are all factors leaving India’s credit rating in a vulnerable position.

And experts have struggled to retain confidence in the world’s ninth largest economy, after the country underwent an overall score decline of 2.2 points to 52.3 in 2012. India’s increased risk this year left the country falling five positions in the ECR rankings.

The sovereign’s global rank of 61 leaves the sovereign sitting one position below Russia in ECR’s tier three, which is the lowest position among the Bric group of large emerging economies. India’s position in the ECR rankings equates with S&P’s BBB-rating, which also assigned India with the lowest investment grade among the Brics, leaving it only one notch above junk status.

John Sharma, economist at National Australia Bank and one of ECR’s expert contributors, points to the country’s challenging fiscal position as the main threat to India’s risk profile in 2013.

“India's fiscal deficit for the April to September period, in seasonally adjusted terms, reached 7.1% of GDP (c.f. 6.7% of GDP) in the previous year,” he says. “In general, India continues to face challenges with the issue of twin deficits: current account and fiscal deficit. Moreover, there is an election due next year, which might make fiscal consolidation measures tricky.”

India’s fiscal position remains the country’s most pressing rating constraint, according to ECR contributors. The sovereign’s government finances indicator is the weakest of the country’s economic assessment scores, on a score of 4.0 points (out of 10), and shed 0.3 points in 2012.

                                               Source: ECR