Fears are growing about the Indian governments ability to manage its debt burden, as the national election is likely to stall the reform agenda, according to economists participating in Euromoneys Country Risk Survey.
Reform implementation could prove tricky if the government veers off its all-important fiscal consolidation track to salvage the partys position at the top of the election polls.
Analysts fears that a stalled reform agenda could tarnish the countrys investment allure and lead to a widening in the countrys 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 Poors (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 countrys fiscal deficit-reduction targets to 5.3% of GDP in the fiscal year to March. In a bid to reduce the countrys 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 Indias credit rating in a vulnerable position.
And experts have struggled to retain confidence in the worlds ninth largest economy, after the country underwent an overall score decline of 2.2 points to 52.3 in 2012. Indias increased risk this year left the country falling five positions in the ECR rankings.
The sovereigns global rank of 61 leaves the sovereign sitting one position below Russia in ECRs tier three, which is the lowest position among the Bric group of large emerging economies. Indias position in the ECR rankings equates with S&Ps 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 ECRs expert contributors, points to the countrys challenging fiscal position as the main threat to Indias 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.
Indias fiscal position remains the countrys most pressing rating constraint, according to ECR contributors. The sovereigns government finances indicator is the weakest of the countrys economic assessment scores, on a score of 4.0 points (out of 10), and shed 0.3 points in 2012.