India’s sovereign rating suffers as deficits balloon

February 24th, 2009 - 6:00 pm ICT by IANS  

New Delhi, Feb 24 (IANS) Global rating agency Standard and Poor’s (S&P) Tuesday changed its outlook on India’s long-term sovereign credit rating from stable to negative.
“The outlook revision reflects our view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term,” S&P said in a statement.

According to the agency, the farm loan waiver and a salary hike for government employees were primary reasons for the country’s fiscal situation worsening.

It said the fiscal deficit was likely to increase to 11.4 percent in 2008-09, as compared to 5.7 percent in the last financial year, while it would be 11.1 percent in 2009-2010.

S&P’s concern over India’s financial position was shared by investment bank Goldman Sachs and economic analysis provider Moody’s as well.

“With the fiscal deficit ballooning to an estimated 10.3 percent of GDP in FY09 and, in our view, remaining at elevated levels due to structural spending increases such as an expanding interest bill, we expect government debt levels to remain high,” said Tushar Poddar, economist with Goldman Sachs, in a statement released Tuesday.

“We expect government debt to grow further to 82 percent of GDP in FY10 and 85 percent of GDP in FY13 from 78 percent of GDP in FY09,” he said.

Added Nikhilesh Bhattacharyya, associate economist at Moody’s “A large fiscal deficit could pose problems for the banking sector, with a wide funding gap forcing the government to issue large amounts of debt, pushing up India’s risk-free interest rate and depressing the price of government bonds, large volumes of which are held by banks.”

Another rating agency, Fitch, had last week also said India’s financial situation was a matter of concern.

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