India’s biggest industry bodies urged the government of India to get moving on the stalled reform process, responding to global ratings agency Standard & Poor (S&P) cutting its outlook on India’s financial health.
S&P also cut its outlook on at least six Indian companies, including Infosys Technologies, TCS and Wipro, following the country-wide cut in credit outlook.
An outlook cut is not as drastic as a credit rating cut, but is often a prelude to one. A rating cut implies that there is a higher risk of default or non-payment on loans given to the Indian government and Indian companies.
A lower rating also negatively impacts the sentiments of companies and investors who would like to invest in India, as it means that their investments may get ‘trapped’ in the country if India ‘runs out of cash.’ A country ‘runs out of cash’ when it has no foreign exchange currency to pay for crucial imports such as oil and food.
S&P also pegged India’s per-capita (per-person) GDP growth to be at about 5.3% in the current year.
“High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle–with the next elections to be held by May 2014–and the current political gridlock.
“Such reforms include reducing fuel and fertilizer subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors,” S&P said.
It pointed out that India’s foreign currency reserves cover about six months of current account payments, down from eight months in 2008 and 2009.
“Similarly, the country’s net external liability position has risen to about 50% of current account receipts, but more than half is related to foreign direct investment and portfolio equity flows, which are less problematic than debt in most scenarios,” it added.
In a statement, CII suggested that “the Government take measures to push for reforms especially in the areas of FDI, GST and DTC. CII strongly feels that further opening up India in sectors such as Aviation, Insurance and opening up multi brand retailing will help improve foreign capital inflows and also improve investors’ sentiment.”
Similarly, Assocham said “Standard & Poor’s cutting India’s outlook to negative should prompt the government to keep its political compulsions away and demonstrate that the reforms process is well on track.”
“Fiscal consolidation is must to reverse economic indicators. This will include removing subsidies for fuel, fertilisers and social schemes,” Assocham secretary general D.S. Rawat said.
India had opened up foreign investment in retail, but rolled back the decision in a matter of days after small traders and political parties opposed it.
Similarly, India has among the world’s largest subsidy programs for fuel, fertilizer and food. Most of the subsidies, more than half — according to most experts — are siphoned off by corrupt government officials in collusion with unscrupulous private businesses.
Several government-appointed panels have suggested replacing the current food and fertilizer subsidy regime (worth about Rs 1.5 lakh crore or $30 billion a year) with a direct cash-transfer regime.
However, the government has failed to implement any major economic reform in the last 5 years, except the deregulation of petrol prices. However, various levels of the government continue to charge a tax of about 100% on petrol, resulting in high motor fuel prices in recent years.
In addition to cutting the outlook on the country as a whole, S&P also revised its outlook on individual companies in India, including NTPC, NHPC and SAIL.
“Our ratings on these GREs (government related entities) are highly influenced by the sovereign rating given the entities’ sensitivity to government intervention in the event of financial distress,” it said.
It also cut its outlook on India’s biggest IT companies Infosys Ltd., Tata Consultancy Services Ltd., and Wipro Ltd as a result of the revision on India as a whole.
“The outlook revisions follow a similar action on the sovereign credit rating on India. Our ratings on Indian information technology companies reflect our ‘BBB+’ transfer and convertibility (T&C) assessment of India. We could lower the ratings on these companies if we revise downward our T&C assessment. We could lower our T&C assessment if we downgrade the sovereign credit rating,” it added.