Government's reform initiatives fail to persuade S&P

'Credit rating agency Standard & Poor's Rating Services on Friday announced that it would retain India's sovereign rating at investment grade. But it also stuck to its position that the India outlook was negative.

"Negative outlook signals at least one-in-three likelihood of a downgrade within the next 12 months," said a report issued by the agency.

The report said the current political turbulence which has resulted in a logjam in Parliament and the risk of loose spending in the run-up to a general election (scheduled for 2014) posed a risk to the economy.

S&P acknowledged that the government had carried out reforms since September and managed to rein in the fiscal deficit. However, its efforts were not enough to change the outlook, the agency concluded.

S&P's ratings are unsolicited. The Indian government does not borrow overseas in the bond markets. However, the ratings are used by Foreign Institutional Investors to allocate funds. In other words, if the ratings slip from investment grade to speculative grade, India runs the risk of seeing an outflow of foreign portfolio investment. It would be an inopportune moment for an outflow as currently India has a record current account deficit (the excess of imports over exports and inward remittances). In the October-December 2012 quarter, the latest available data, CAD was 6.7 per cent of GDP, a record level.

Therefore, given the pivotal role of ratings for FIIs in allocating money, the finance ministry has made presentations to S&P and other ratings recently to highlight what they have done recently to boost the economy.

It does not seem to have worked, triggering a reaction from the ministry's chief economic advisor, Raghuram G. Rajan.

"It is disappointing that S&P has not seen it fit to improve its outlook for India, especially when it acknowledges the important steps taken by the Indian Government in recent months," Rajan said in an emailed statement. "The government will continue to do what is necessary to keep India on a stable, sustainable, and strengthening growth path."

It's not just the credit rating agency to whom the government constantly communicates. Finance Minister P. Chidambaram was abroad on a visit to the Middle East, United Kingdom and France when S&P made its announcement. He is in the process of meeting with investors in these places to present the government's take on the economic situation. It is his third such visit since January, an indication that it is not going to be easy for India to regain its lost credibility among international investors.